**UNITED            STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM** **10-Q**
| **(Mark One)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| **x****Quarterly Report                        Pursuant to Section** **13 or 15(d)** **of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **for the quarterly period                        ended September 30, 2007.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Or**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **o****Transition Report                        Pursuant to Section** **13 or 15(d)** **of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **for the transition period                        from**                                                                              **to**                                                                        |
| **Commission File Number                        000-50266**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |

 

 

**TRINITY CAPITAL CORPORATION**

(Exact name of registrant as specified in its charter)

 
| **New Mexico**                                                              |   | **85-0242376**                          |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|
| (State of incorporation)                                                    |   | (I.R.S. Employer Identification Number) |
|                                                                        |   |                                    |
| **1200 Trinity Drive, Los Alamos, New Mexico                        87544** |
| (Address of principal executive offices)                                    |
|                                                                        |   |                                    |
| **(505)** **662-5171**                                                 |
| Telephone number                                                            |

 

Indicate by check mark whether the registrant (1) has filed all reports            required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934            during the preceding 12 months (or for such shorter period that the registrant was            required to file such reports), and (2) has been subject to such filing requirements            for the past 90 days. Yes**x**Noo

             

Indicate by check mark whether the registrant is a large accelerated            filed, an accelerated filer, or a non-accelerated filer. See definition of            “accelerated filer” and “large accelerated filer” in Rule 12b-2            of the Exchange Act. (Check one)

             
| Large Accelerated                        Filer  o | Accelerated                        Filer  **x** | Non-Accelerated                        Filer  o |
|-------------------------------------------------------------|-----------------------------------------------------------|-----------------------------------------------------------|

             

Indicate by check mark whether the registrant is a shell company (as            defined in Rule 12b-2 of the Act).**?**  Yes  x  No

APPLICABLE            ONLY TO CORPORATE ISSUERS:Indicate the number of            shares outstanding of each of the issuer’s classes of common stock, as of the            latest practicable date: 6,492,628 shares of common stock, no par value, outstanding as            of November 9, 2007.

             

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**TRINITY CAPITAL CORPORATION AND SUBSIDIARIES**

 
| **PART I. FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |   |
| Item 1.                           | Financial                        Statements |
|                              |   |
| Item 2.                           | Management’s Discussion                        and Analysis of Financial Condition and Results of Operations |
|                              |   |
| Item 3.                           | Quantitative and Qualitative                        Disclosures About Market Risk |
|                              |   |
| Item 4.                           | Controls and                        Procedures |
|                              |   |
| **PART II. OTHER INFORMATION**    |
|                              |   |
| Item 1.                           | Legal Proceedings |
|                              |   |
| Item 1A.                          | Risk Factors |
|                              |   |
| Item 2.                           | Unregistered Sales of Equity                        Securities and Use of Proceeds |
|                              |   |
| Item 3.                           | Defaults Upon Senior                        Securities |
|                              |   |
| Item 4.                           | Submission of Matters to a                        Vote of Securities Holders |
|                              |   |
| Item 5.                           | Other Information |
|                              |   |
| Item 6.                           | Exhibits |
|                              |   |
|                              | SIGNATURES |
|                              |   |
|                              | CERTIFICATIONS |

 

 

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**PART** **I            – FINANCIAL INFORMATION**

**Item 1.            Financial Statements**

**TRINITY            CAPITAL CORPORATION** **&            SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**September 30, 2007 and            December** **31,            2006**

**(Amounts in thousands, except share data)**
|                                                                                                                                                                                  |   | **September 30, 2007** |      |   |   | **December 31, 2006** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|-----------|--------|--------|-----------------------|--------|
|                                                                                                                                                                                  |   | **(Unaudited)**        |      |   |   |                  |   |
| **ASSETS**                                                                                                                                                                            |   |                   |      |   |   |                  |   |   |   |
| Cash and due from banks                                                                                                                                                               |   | $                      | 21,157    |   |   |                  | $      | 23,292 |   |
| Interest-bearing deposits with banks                                                                                                                                                  |   |                   | 13,263    |   |   |                  |   | 49,598 |   |
| Federal funds sold and securities purchased under resell                        agreements                                                                                            |   |                   | 15,391    |   |   |                  |   | 700 |   |
| **Cash and cash equivalents**                                                                                                                                                         |   |                   | 49,811    |   |   |                  |   | 73,590 |   |
| Investment securities available for sale                                                                                                                                              |   |                   | 134,772   |   |   |                  |   | 87,950 |   |
| Investment securities held to maturity, at amortized cost                        (fair value of $9,372 at September 30, 2007 and $10,961 at December 31,                        2006) |   |                   | 9,372     |   |   |                  |   | 10,968 |   |
| Other investments                                                                                                                                                                     |   |                   | 7,827     |   |   |                  |   | 7,936 |   |
| Loans (net of allowance for loan losses of $13,528 at                        September 30, 2007 and $12,167 at December 31, 2006                                                      |   |                   | 1,169,723 |   |   |                  |   | 1,119,557 |   |
| Loans held for sale                                                                                                                                                                   |   |                   | 4,638     |   |   |                  |   | 10,349 |   |
| Premises and equipment, net                                                                                                                                                           |   |                   | 24,203    |   |   |                  |   | 24,255 |   |
| Leased property under capital leases, net                                                                                                                                             |   |                   | 2,211     |   |   |                  |   | 2,211 |   |
| Accrued interest receivable                                                                                                                                                           |   |                   | 10,510    |   |   |                  |   | 9,465 |   |
| Mortgage servicing rights, net                                                                                                                                                        |   |                   | 8,372     |   |   |                  |   | 9,115 |   |
| Other real estate owned                                                                                                                                                               |   |                   | 1,210     |   |   |                  |   | 165 |   |
| Other assets                                                                                                                                                                          |   |                   | 4,868     |   |   |                  |   | 3,718 |   |
| **Total assets**                                                                                                                                                                      |   | $                      | 1,427,517 |   |   |                  | $      | 1,359,279 |   |
|                                                                                                                                                                                  |   |                   |      |   |   |                  |   |   |   |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                                                                              |   |                   |      |   |   |                  |   |   |   |
| Liabilities                                                                                                                                                                           |   |                   |      |   |   |                  |   |   |   |
| Deposits:                                                                                                                                                                             |   |                   |      |   |   |                  |   |   |   |
| Noninterest-bearing                                                                                                                                                                   |   | $                      | 101,000   |   |   |                  | $      | 89,356 |   |
| Interest-bearing                                                                                                                                                                      |   |                   | 1,125,927 |   |   |                  |   | 1,073,385 |   |
| **Total deposits**                                                                                                                                                                    |   |                   | 1,226,927 |   |   |                  |   | 1,162,741 |   |
| Short-term borrowings                                                                                                                                                                 |   |                   | 40,000    |   |   |                  |   | 681 |   |
| Long-term borrowings                                                                                                                                                                  |   |                   | 23,578    |   |   |                  |   | 63,603 |   |
| Long-term capital lease obligations                                                                                                                                                   |   |                   | 2,211     |   |   |                  |   | 2,211 |   |
| Junior subordinated debt owed to unconsolidated                        trusts                                                                                                         |   |                   | 37,116    |   |   |                  |   | 37,116 |   |
| Borrowings made by Employee Stock Ownership Plan (ESOP) to                        outside parties                                                                                     |   |                   | 271       |   |   |                  |   | 743 |   |
| Accrued interest payable                                                                                                                                                              |   |                   | 6,571     |   |   |                  |   | 5,773 |   |
| Other liabilities                                                                                                                                                                     |   |                   | 3,339     |   |   |                  |   | 5,733 |   |
| **Total liabilities**                                                                                                                                                                 |   |                   | 1,340,013 |   |   |                  |   | 1,278,601 |   |

**(Continued on following page)**

 

1

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**TRINITY CAPITAL CORPORATION** **& SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**September 30, 2007 and            December** **31,            2006**

**(Amounts in thousands, except share data) (Continued from prior            page)**

 
|                                                                                                                                                                                                                                                                                                                                                                                                            |   | **September 30, 2007** |      |   |   | **December 31, 2006** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|-----------|--------|--------|-----------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                            |   | **(Unaudited)**        |      |   |   |                  |   |
| Stock owned by Employee Stock Ownership Plan (ESOP)                        participants; 625,585 shares and 629,066 shares at September 30, 2007 and                        December 31, 2006, respectively, at fair value; net of unearned ESOP shares                        of 17,627 and 44,200 shares at September 30, 2007 and December 31, 2006,                        respectively, at historical cost |   | $                      | 16,653    |   |   |                  | $      | 17,438 |   |
| Commitments and contingencies (Note 10)                                                                                                                                                                                                                                                                                                                                                                         |   |                   |      |   |   |                  |   |   |   |
| Stockholders' equity                                                                                                                                                                                                                                                                                                                                                                                            |   |                   |      |   |   |                  |   |   |   |
| Common stock, no par, authorized 20,000,000 shares; issued                        6,856,800 shares, shares outstanding 6,492,628 and 6,532,898 at September                        30, 2007 and December 31, 2006, respectively                                                                                                                                                                                 |   |                   | 6,836     |   |   |                  |   | 6,836 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                      |   |                   | 1,481     |   |   |                  |   | 1,067 |   |
| Retained earnings                                                                                                                                                                                                                                                                                                                                                                                               |   |                   | 71,896    |   |   |                  |   | 62,939 |   |
| Accumulated other comprehensive (loss)                                                                                                                                                                                                                                                                                                                                                                          |   |                   | (4        | )      |   |                  |   | (158 | ) |
| Total stockholders' equity before treasury stock                                                                                                                                                                                                                                                                                                                                                                |   |                   | 80,209    |   |   |                  |   | 70,684 |   |
| Treasury stock, at cost, 346,545 shares and 279,702 shares                        at September 30, 2007 and December 31, 2006, respectively                                                                                                                                                                                                                                                                     |   |                   | (9,358    | )      |   |                  |   | (7,444 | ) |
| **Total stockholders' equity**                                                                                                                                                                                                                                                                                                                                                                                  |   |                   | 70,851    |   |   |                  |   | 63,240 |   |
| **Total liabilities and stockholders' equity**                                                                                                                                                                                                                                                                                                                                                                  |   | $                      | 1,427,517 |   |   |                  | $      | 1,359,279 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                            |   |                   |      |   |   |                  |   |   |   |

 

The            accompanying notes are an integral part of these unaudited consolidated financial            statements.

 

2

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 **TRINITY CAPITAL            CORPORATION** **&            SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**For the Three and Nine Months Ended September 30, 2007 and            2006**

**(Amounts in thousands except share and per share data)            (Unaudited)**

 
|                                                                           |   | **Three Months Ended** |   | **Nine Months Ended**  |   |
|--------------------------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                                                           |   | **September 30, 2007** |   | **September 30, 2006** |   | **September 30, 2007** |   | **September 30, 2006** |   |
| Interest income:                                                               |   |                   |   |                   |   |   |   |   |   |
| Loans, including fees                                                          |   | $                      | 22,700 |                   | $      | 20,513 |   | $ | 66,864 |   | $ | 58,128 |   |
| Investment securities:                                                         |   |                   |   |                   |   |   |   |   |   |
| Taxable                                                                        |   | 1,658                  |   | 832                    |   | 3,466 |   | 2,732 |   |
| Nontaxable                                                                     |   | 228                    |   | 189                    |   | 792 |   | 591 |   |
| Federal funds sold                                                             |   | 23                     |   | 6                      |   | 60 |   | 11 |   |
| Other interest-bearing deposits                                                |   | 407                    |   | 155                    |   | 1,291 |   | 308 |   |
| Investment in unconsolidated trusts                                            |   | 23                     |   | 22                     |   | 69 |   | 66 |   |
| **Total interest income**                                                      |   | 25,039                 |   | 21,717                 |   | 72,542 |   | 61,836 |   |
| Interest expense:                                                              |   |                   |   |                   |   |   |   |   |   |
| Deposits                                                                       |   | 10,953                 |   | 8,756                  |   | 31,630 |   | 22,746 |   |
| Short-term borrowings                                                          |   | 341                    |   | 247                    |   | 360 |   | 666 |   |
| Long-term borrowings                                                           |   | 289                    |   | 623                    |   | 1,512 |   | 1,931 |   |
| Junior subordinated debt owed to unconsolidated                        trusts  |   | 765                    |   | 760                    |   | 2,292 |   | 2,224 |   |
| **Total interest expense**                                                     |   | 12,348                 |   | 10,386                 |   | 35,794 |   | 27,567 |   |
| **Net interest income**                                                        |   | 12,691                 |   | 11,331                 |   | 36,748 |   | 34,269 |   |
| Provision for loan losses                                                      |   | 1,050                  |   | 1,322                  |   | 3,150 |   | 4,122 |   |
| **Net interest income after provision for loan                        losses** |   | 11,641                 |   | 10,009                 |   | 33,598 |   | 30,147 |   |
| Other income:                                                                  |   |                   |   |                   |   |   |   |   |   |
| Mortgage loan servicing fees                                                   |   | 606                    |   | 662                    |   | 1,859 |   | 1,969 |   |
| Loan and other fees                                                            |   | 884                    |   | 732                    |   | 2,577 |   | 2,253 |   |
| Service charges on deposits                                                    |   | 441                    |   | 386                    |   | 1,263 |   | 1,164 |   |
| Gain on sale of loans                                                          |   | 347                    |   | 538                    |   | 1,284 |   | 1,429 |   |
| Gain on sale of securities                                                     |   | 62                     |   | —                |   | 62 |   | — |   |
| Other operating income                                                         |   | 313                    |   | 458                    |   | 911 |   | 1,260 |   |
|                                                                           |   | 2,653                  |   | 2,776                  |   | 7,956 |   | 8,075 |   |
| Other expenses:                                                                |   |                   |   |                   |   |   |   |   |   |
| Salaries and employee benefits                                                 |   | 4,559                  |   | 4,065                  |   | 13,763 |   | 12,913 |   |
| Occupancy                                                                      |   | 964                    |   | 836                    |   | 2,880 |   | 2,521 |   |
| Data processing                                                                |   | 498                    |   | 448                    |   | 1,349 |   | 1,343 |   |
| Marketing                                                                      |   | 528                    |   | 441                    |   | 1,568 |   | 1,382 |   |
| Amortization and valuation of mortgage servicing                        rights |   | 596                    |   | 636                    |   | 1,692 |   | 1,658 |   |
| Supplies                                                                       |   | 61                     |   | 140                    |   | 595 |   | 490 |   |
| (Gain) loss on sale of other real estate owned                                 |   | (92                    | )      | 8                      |   | (122 | ) | 240 |   |
| Postage                                                                        |   | 134                    |   | 142                    |   | 464 |   | 445 |   |
| Other                                                                          |   | 1,370                  |   | 1,139                  |   | 3,761 |   | 3,589 |   |
|                                                                           |   | 8,618                  |   | 7,855                  |   | 25,950 |   | 24,581 |   |
| **Income before income taxes**                                                 |   | 5,676                  |   | 4,930                  |   | 15,604 |   | 13,641 |   |
| Income taxes                                                                   |   | 1,944                  |   | 1,860                  |   | 5,552 |   | 5,128 |   |
| **Net income**                                                                 |   | $                      | 3,732  |                   | $      | 3,070 |   | $ | 10,052 |   | $ | 8,513 |   |
| Basic earnings per common                        share                         |   | $                      | 0.57   |                   | $      | 0.47 |   | $ | 1.54 |   | $ | 1.29 |   |
| Diluted earnings per                        common share                       |   | $                      | 0.57   |                   | $      | 0.46 |   | $ | 1.53 |   | $ | 1.29 |   |

 

The            accompanying notes are an integral part of these unaudited consolidated financial            statements.

 

3

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**TRINITY CAPITAL CORPORATION** **& SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Nine Months Ended September 30, 2007 and 2006**

**(Amounts in thousands) (Unaudited)**

 
|                                                                                                              |   | **Nine Months Ended**  |    |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                                              |   | **September 30, 2007** |    |   |   | **September 30, 2006** |   |
| Cash Flows From Operating Activities                                                                              |   |                   |    |   |   |   |   |   |   |
| Net income                                                                                                        |   | $                      | 10,052  |   |   |   | $ | 8,513 |   |
| Adjustments to reconcile net income to net cash provided by                        operating activities:          |   |                   |    |   |   |   |   |   |   |
| Depreciation and amortization                                                                                     |   |                   | 1,723   |   |   |   |   | 1,810 |   |
| Net amortization of:                                                                                              |   |                   |    |   |   |   |   |   |   |
| Mortgage servicing rights                                                                                         |   |                   | 2,132   |   |   |   |   | 2,043 |   |
| Premium and discounts on investment securities,                        net                                        |   |                   | (520    | ) |   |   |   | (204 | ) |
| Junior subordinated debt owed to unconsolidated trusts                        issuance costs                      |   |                   | 10      |   |   |   |   | 15 |   |
| Provision for loan losses                                                                                         |   |                   | 3,150   |   |   |   |   | 4,122 |   |
| Recovery of mortgage servicing rights                                                                             |   |                   | (440    | ) |   |   |   | (385 | ) |
| Loss on disposal of premises and equipment                                                                        |   |                   | 24      |   |   |   |   | 14 |   |
| (Gain) loss on sale of investment securities                                                                      |   |                   | (62     | ) |   |   |   | — |   |
| Federal Home Loan Bank (FHLB) stock dividends                        received                                     |   |                   | (169    | ) |   |   |   | (193 | ) |
| Loss on venture capital investments                                                                               |   |                   | 72      |   |   |   |   | — |   |
| Gain on sale of loans                                                                                             |   |                   | (1,284  | ) |   |   |   | (1,429 | ) |
| (Gain) loss on disposal of other real estate                        owned                                         |   |                   | (9      | ) |   |   |   | 1 |   |
| Write-down of value of other real estate owned                                                                    |   |                   | — |   |   |   |   | 40 |   |
| (Increase) in other assets                                                                                        |   |                   | (2,201  | ) |   |   |   | (671 | ) |
| Increase in other liabilities                                                                                     |   |                   | 601     |   |   |   |   | (320 | ) |
| Release of Employee Stock Ownership Plan (ESOP)                        shares                                     |   |                   | 697     |   |   |   |   | 722 |   |
| Stock options and stock appreciation rights                        expenses                                       |   |                   | 119     |   |   |   |   | — |   |
| Tax benefit recognized for exercise of stock                        options                                       |   |                   | (57     | ) |   |   |   | (331 | ) |
| **Net cash provided by operating activities before                        originations and gross sales of loans** |   |                   | 13,838  |   |   |   |   | 13,747 |   |
| Gross sales of loans held for sale                                                                                |   |                   | 87,066  |   |   |   |   | 113,484 |   |
| Origination of loans held for sale                                                                                |   |                   | (81,020 | ) |   |   |   | (111,182 | ) |
| **Net cash provided by operating activities**                                                                     |   |                   | 19,884  |   |   |   |   | 16,049 |   |

 

**(Continued on following page)**

 

4

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**TRINITY CAPITAL CORPORATION** **& SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Nine Months Ended September 30, 2007 and 2006**

**(Amounts in thousands) (Unaudited) (Continued from prior            page)**

 
|                                                                                                      |   | **Nine Months Ended**  |     |
|-----------------------------------------------------------------------------------------------------------|--------|------------------------|----------|
|                                                                                                      |   | **September 30, 2007** |     |   |   | **September 30, 2006** |   |
| Cash Flows From Investing Activities                                                                      |   |                   |     |   |   |   |   |   |   |
|                                                                                                      |   |                   |     |   |   |   |   |   |   |
| Proceeds from maturities and paydowns of investment                        securities, available for sale |   | $                      | 62,540   |   |   |   | $ | 22,873 |   |
| Proceeds from maturities and paydowns of investment                        securities, held to maturity   |   |                   | 1,594    |   |   |   |   | 15,367 |   |
| Proceeds from maturities and paydowns of investment                        securities, other              |   |                   | 1,072    |   |   |   |   | — |   |
| Proceeds from sale of investment securities, available for                        sale                    |   |                   | 14,784   |   |   |   |   | — |   |
| Purchase of investment securities available for                        sale                               |   |                   | (123,307 | ) |   |   |   | (7,008 | ) |
| Purchase of investment securities other                                                                   |   |                   | (866     | ) |   |   |   | (1,144 | ) |
| Proceeds from sale of other real estate owned                                                             |   |                   | 401      |   |   |   |   | 334 |   |
| Loans funded, net of repayments                                                                           |   |                   | (54,753  | ) |   |   |   | (106,782 | ) |
| Purchases of premises and equipment                                                                       |   |                   | (1,695   | ) |   |   |   | (1,383 | ) |
| **Net cash (used in) investing activities**                                                               |   |                   | (100,230 | ) |   |   |   | (77,743 | ) |
| Cash Flows From Financing Activities                                                                      |   |                   |     |   |   |   |   |   |   |
| Net increase in demand deposits, NOW accounts and savings                        accounts                 |   |                   | 74,164   |   |   |   |   | 16,875 |   |
| Net (decrease) in time deposits                                                                           |   |                   | (9,978   | ) |   |   |   | 67,487 |   |
| Repayment of borrowings                                                                                   |   |                   | (706     | ) |   |   |   | (5,985 | ) |
| Repayment of ESOP debt                                                                                    |   |                   | (472     | ) |   |   |   | (471 | ) |
| Proceeds from issuance of trust preferred                        securities                               |   |                   | —  |   |   |   |   | 10,310 |   |
| Purchase of treasury stock                                                                                |   |                   | (2,200   | ) |   |   |   | (1,375 | ) |
| Issuance of common stock for stock option plan                                                            |   |                   | 290      |   |   |   |   | 1,230 |   |
| Dividend payments                                                                                         |   |                   | (4,588   | ) |   |   |   | (4,509 | ) |
| Tax benefit recognized for exercise of stock                        options                               |   |                   | 57       |   |   |   |   | 331 |   |
| **Net cash provided by financing activities**                                                             |   |                   | 56,567   |   |   |   |   | 83,893 |   |
| **Net (decrease) in cash and cash                        equivalents**                                    |   |                   | (23,779  | ) |   |   |   | 22,199 |   |
| Cash and cash equivalents:                                                                                |   |                   |     |   |   |   |   |   |   |
| Beginning of period                                                                                       |   |                   | 73,590   |   |   |   |   | 54,682 |   |
| End of period                                                                                             |   | $                      | 49,811   |   |   |   | $ | 76,881 |   |
| Supplemental Disclosures of Cash Flow Information                                                         |   |                   |     |   |   |   |   |   |   |
| Cash payments for:                                                                                        |   |                   |     |   |   |   |   |   |   |
| Interest                                                                                                  |   | $                      | 34,996   |   |   |   | $ | 27,084 |   |
| Income taxes                                                                                              |   |                   | 6,894    |   |   |   |   | 4,213 |   |
| Non-cash investing and financing activities:                                                              |   |                   |     |   |   |   |   |   |   |
| Transfers from loans to other real estate owned                                                           |   |                   | 1,437    |   |   |   |   | 25 |   |
| Change in unrealized gain on investment securities, net of                        taxes                   |   |                   | 150      |   |   |   |   | (138 | ) |

 

The            accompanying notes are an integral part of these unaudited consolidated financial            statements.

 

5

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**TRINITY CAPITAL CORPORATION** **& SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note** **1.            Basis of Presentation**

 

The accompanying unaudited consolidated financial statements include the            consolidated balances and results of operations of Trinity Capital Corporation            (“Trinity”) and its wholly owned subsidiaries: Los Alamos National Bank            (the “Bank”), Title Guaranty & Insurance Company (“Title            Guaranty”), TCC Appraisal Services Corporation (“TCC Appraisals”),            TCC Advisors Corporation (“TCC Advisors”) and TCC Funds, collectively            referred to as the “Company.”  Trinity Capital Trust I            (“Trust I”), Trinity Capital Trust III (“Trust III”),            Trinity Capital Trust IV (“Trust IV”) and Trinity Capital Trust V            (“Trust V”), collectively referred to as the “Trusts,” are            trust subsidiaries of Trinity but are not consolidated in these financial statements            (see “Consolidation” accounting policy below). Trinity Capital Trust II            (“Trust II”) was terminated on December 12, 2006. The business activities            of the Company consist solely of the operations of its wholly owned subsidiaries. All            significant inter-company balances and transactions have been eliminated in            consolidation. In the opinion of management, all adjustments (consisting only of normal            recurring adjustments) necessary for a fair presentation of the financial position,            results of operations and cash flows for the interim periods have been made. The            results of operations for the three and nine months ended September 30, 2007 are not            necessarily indicative of the results to be expected for the entire fiscal            year.

 

The unaudited consolidated interim financial statements have been            prepared in conformity with accounting principles generally accepted in the United            States of America and industry practice. Certain information in footnote disclosures            normally included in financial statements prepared in accordance with accounting            principles generally accepted in the United States of America and industry practice has            been condensed or omitted pursuant to rules and regulations of the Securities and            Exchange Commission. These financial statements should be read in conjunction with the            consolidated financial statements and notes thereto included in the Company’s            December 31, 2006 audited financial statements filed on Form 10-K.

             

The consolidated financial statements include the accounts of the            Company. The accounting and reporting policies of the Company conform to accounting            principles generally accepted in the United States of America and general practices            within the financial services industry. In preparing the financial statements,            management is required to make estimates and assumptions that affect the reported            amounts of assets and liabilities as of the date of the balance sheet and revenues and            expenses for the year. Actual results could differ from those estimates. Areas            involving the use of management’s estimates and assumptions, and which are more            susceptible to change in the near term include the allowance for loan losses and            initial recording and subsequent valuation for impairment of mortgage servicing            rights.

             

Certain items have been reclassified from prior period presentations in            conformity with the current classification.

             

**Note            2. Comprehensive Income**

 

Comprehensive income includes net income, as well as the change in net            unrealized gain on investment securities available for sale, net of tax. Comprehensive            income was $3.9 million and $3.3 million for of the three month periods ended September            30, 2007 and September 30, 2006, respectively and $10.2 million and $8.5 million for            the nine month periods ended September 30, 2007 and September 30, 2006,            respectively.

             

 

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**Note            3. Earnings Per Share Data**

 

The following table sets forth the computation of basic and diluted            earnings per share for the periods indicated:

 
|                                                                                                |   | **Three Months Ended**                                                                |   | **Nine Months Ended**      |   |
|----------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                                                     |   | **September** **30,**                                                            |   | **September** **30,** |   |
|                                                                                                     |   | **2007**                                                                              |   | **2006**                   |   | **2007** |   | **2006** |   |
|                                                                                                     |   | **(Unaudited; in thousands, except share and per share                        data)** |   |
| Net income                                                                                               |   | $                                                                                     | 3,732  |                       | $      | 3,070 |   | $ | 10,052 |   | $ | 8,513 |   |
| Weighted average common                        shares issued                                             |   | 6,856,800                                                                             |   | 6,856,800                  |   | 6,856,800 |   | 6,856,800 |   |
| LESS: Weighted average                        treasury stock shares                                      |   | (334,259                                                                              | )      | (227,251                   | )      | (311,258 | ) | (227,143 | ) |
| LESS: Weighted average unearned Employee Stock Ownership                        Plan (ESOP) stock shares |   | (17,599                                                                               | )      | (44,515                    | )      | (19,379 | ) | (47,077 | ) |
| Weighted average common                        shares outstanding, net                                   |   | 6,504,942                                                                             |   | 6,585,034                  |   | 6,526,163 |   | 6,582,580 |   |
| Basic earnings per common                        share                                                   |   | $                                                                                     | 0.57   |                       | $      | 0.47 |   | $ | 1.54 |   | $ | 1.29 |   |
| Weighted average dilutive                        shares from stock option plan                           |   | 49,778                                                                                |   | 39,572                     |   | 37,328 |   | 38,440 |   |
| Weighted average common shares outstanding including                        dilutive shares              |   | 6,554,720                                                                             |   | 6,624,606                  |   | 6,563,491 |   | 6,621,020 |   |
| Diluted earnings per                        common share                                                 |   | $                                                                                     | 0.57   |                       | $      | 0.46 |   | $ | 1.53 |   | $ | 1.29 |   |

 

Certain stock options were not included in the above calculation,            pursuant to FAS 128, as these stock options would have an anti-dilutive effect at            current market prices. The total number of shares excluded was 211,500 as of September            30, 2007.

 

**Note            4. Recent Accounting Pronouncements and Regulatory Developments**

 

In September 2006, the Financial Accounting Standards Board (FASB)            issued Statement of Financial Accounting Standards (SFAS) No. 157,*Fair Value Measurements*. This Statement            defines fair value, establishes a framework for measuring fair value in generally            accepted accounting principles (GAAP), and expands disclosures about fair value            measurements. This Statement applies under other accounting pronouncements that require            or permit fair value measurements, the Board having previously concluded in those            accounting pronouncements that fair value is the relevant measurement attribute.            Accordingly, this Statement does not require any new fair value measurements. However,            for some entities, the application of this Statement will change current practice. This            Statement is effective for financial statements issued for fiscal years beginning after            November 15, 2007, and interim periods within those fiscal years. Earlier application            is encouraged, provided that the reporting entity has not yet issued financial            statements for that fiscal year, including financial statements for an interim period            within that fiscal year. Management believes that this statement will not materially            impact the Company’s financial statements.

             

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets and Financial            Liabilities*, which provides companies with an option to            report selected financial assets and liabilities at fair value. The Standard’s            objective is to reduce both complexity in accounting for financial instruments and the            volatility in earnings caused by measuring related assets and liabilities differently.            The standard requires companies to provide additional information that will help            investors and other users of financial statements to more easily understand the effect            of a company’s choice to use fair value on its earnings. It also requires            entities to display the fair value of those assets and liabilities for which a company            has chosen to use fair value on the face of the balance sheet. The new Statement does            not eliminate disclosure requirements included in other accounting standards, including            requirements for disclosures about fair value measurements included in FASB Statements            No. 157,*Fair Value Measurements,*and No. 107,*Disclosures about Fair Value of            Financial Instruments.*This Statement is effective as of the            beginning of an entity’s first fiscal year beginning after November 15, 2007.            Early adoption is permitted as of the beginning of the previous fiscal year provided            that the entity makes that choice in the first 120 days of that fiscal year and also            elects to apply the provisions of FASB Statement No. 157. Management believes that this            statement will not materially impact the Company’s financial            statements.

 

 

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**Note            5. Stock Option Plan**

 

Trinity has two stock incentive plans created for the benefit of key            management and selected employees, the 1998 Stock Option Plan and the Trinity Capital            Corporation 2005 Stock Incentive Plan (the “2005 Plan”). Under the 1998            Stock Option Plan, 400,000 shares (as adjusted for the stock split of            December 19, 2002) from shares held in treasury or authorized but unissued common            stock are reserved for granting options. Under the 2005 Plan, 500,000 shares from            shares held in treasury or authorized but unissued common stock are reserved for            granting stock-based incentive awards. Both of these plans were approved by            Trinity’s shareholders. The Board of Directors determines vesting and pricing of            the awards. All stock options granted through December 31, 2005 vest over three            years and must be exercised within ten years of the date of grant. Stock appreciation            rights granted after December 31, 2005 mature upon their fifth anniversary of grant and            their value will be paid in stock.

 

Trinity’s stock incentive awards have been priced at or above the            market value of the stock based on the last reported sale price as of the date of grant            which is also the date of approval, with the exception of the July 1998 stock option            grant which was granted at $0.25 below the last reported sale price and the January 1,            2006 stock appreciation right grant which was approved on December 15, 2005 and granted            at the closing market price as of December 31, 2005. Trinity set the SARs grant date            for 2005 on a date other than the approval date due to accounting rule changes that            took affect on January 1, 2006 that were advantageous to Trinity. Trinity has awarded            all stock option and SARs based on the last reported market price of Trinity’s            stock on the option grant date, with the exception of the July 1998 and January 2006            grants as described above.

 

Effective January 1, 2006, the Company adopted SFAS No. 123(R),*Share-Based Payment*, which is an Amendment            of FASB Statement Nos. 123 and 95. The Company adopted this standard using the modified            prospective transaction method. Prior to the adoption of SFAS 123(R), the Company            measured stock-based compensation cost in accordance with the methods prescribed in            Accounting Principles Board (APB) Opinion No. 25,*Accounting            for Stock Issued to Employees*. Accordingly, no compensation            cost was recognized for options granted and vested before January 1, 2006.

 

Under the provisions of SFAS 123(R), the Company is required to            recognize compensation expense for share-based compensation that vests after adoption            of the new standard. The Company uses the Black-Scholes model to value the stock            incentives on the date of the grant, and recognizes this expense over the remaining            vesting term for the stock incentives. Key assumptions used in this valuation method            (detailed below) are the volatility of the Trinity’s stock price, a risk-free            rate of return (using the U.S. Treasury yield curve) based on the expected term from            grant date to exercise date and an annual dividend rate based upon the current market            price. Expected term from grant date is based upon the historical time from grant to            exercise experienced by the Company.

 

The following table details the assumptions used in by the Black-Scholes            model for valuing share-based compensation granted during the respective periods. There            were no options granted during the three months ending September 30, 2007 or September            30, 2006. The weighted-average grant-date fair value of options granted during the nine            months ending September 30, 2007 and September 30, 2006 was $4.32 and $4.33,            respectively.

 
|                     | **Three Months Ended September 30,** |   | **Nine Months Ended June 30,** |   |
|--------------------------|--------------------------------------|--------|--------------------------------|--------|
|                     | **2007**                             |   | **2006**                       |   | **2007** |   | **2006** |   |
|                     |                                 |   |                           |   |   |   |
| Stock price volatility   | —                              |   | —                        |   | 12.82 | % |   | 14.12 | % |
| Risk-free rate           | —                              |   | —                        |   | 4.70 | % |   | 4.35 | % |
| Expected dividends       | —                              |   | —                        |   | 2.40 | % |   | 2.29 | % |
| Expected term (in years) | —                              |   | —                        |   | 5 |   |   | 5 |   |

 

 

8

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A summary of stock option and stock appreciation right activity under            the plans as of September 30, 2007, and changes during the first nine months of the            year is presented below:

 
|                              |   | **Shares** |   | **Weighted-Average Exercise Price** |   | **Weighted-Average Remaining Contractual Term, in                        years** |   | **Aggregate Intrinsic Value (in thousands)** |   |
|-----------------------------------|--------|------------|--------|-------------------------------------|--------|----------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                              |   |       |   |
| Outstanding at January 1, 2007    |   | 357,408    |   | $                                   | 25.92  |                                                                             |   |                                         |   |   |
| Granted                           |   | 51,000     |   | 28.75                               |   |                                                                             |   |                                         |   |
| Exercised                         |   | (11,013    | )      | 16.00                               |   |                                                                             |   |                                         |   |
| Forfeited or expired              |   | —    |   | —                             |   |                                                                             |   |                                         |   |
| Outstanding at September 30, 2007 |   | 397,395    |   | $                                   | 26.56  |                                                                             | 4.89   |                                         | $      | 1,730 |   |
| Exercisable at September 30, 2007 |   | 242,562    |   | $                                   | 25.24  |                                                                             | 5.29   |                                         | $      | 1,036 |   |

    

No stock options were exercised during the three months ended September            30, 2007. Steve W. Wells exercised 11,013 non-qualified stock options at $16.00 per            share during the nine months ended September 30, 2007. The total intrinsic value of            options exercised during the nine months ended September 30, 2007 and September 30,            2006 was $64 thousand and $168 thousand, respectively.

 

As of September 30, 2007, there was $541 thousand of total unrecognized            compensation cost related to nonvested share-based compensation granted under the            plans. That cost is expected to be recognized over a weighted-average vesting period of            3.2 years. There were 14,000 shares vested during the nine months ending September 30,            2007 for which the Company expensed $56 thousand. Additional shares that will vest in            December 2007 have been ratably expensed in the amount of $39 thousand in the first            nine months of 2007. In addition, the Company expensed $84 thousand for stock            appreciation rights that will vest in 2011 and 2012.

 

**Note            6. Short Term Borrowings**

 

The Company had Federal Home Loan Bank (FHLB) advances with maturity            dates of less than one year of $40.0 million and $681 thousand as of September 30, 2007            and December 31, 2006, respectively. 

             

**Note            7. Long Term Borrowings**

 

The Company had FHLB advances with maturity dates greater than one year            of $23.6 million and $63.6 million as of September 30, 2007 and December 31, 2006,            respectively. As of September 30, 2007, the advances had fixed interest rates ranging            from 3.22% to 6.34%.

 

**Note            8. Long-term Capital Lease Obligations**

 

The Company is leasing land in Santa Fe with the intention of building a            future branch on the site. The lease, which was entered into in December 2006 and            expires in 2014, contains an option to purchase the land at a set price at the            termination of the initial term of the lease. This lease is classified as a capital            lease. Lease payments for the three months ended September 30, 2007 and 2006 were $46            thousand and $0, respectively. Lease payments for the nine months ended September 30,            2007 and 2006 were $140 thousand and $0, respectively.

             

 

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**Note** **9.            Junior Subordinated Debt Owed to Unconsolidated Trusts**

 

The following table presents details on the junior subordinated debt            owed to unconsolidated trusts as of September 30, 2007:

 
|                                                                              |   | **Trust I**                |   | **Trust III**     |   | **Trust IV**      |   | **Trust V**        |   |
|-----------------------------------------------------------------------------------|--------|----------------------------|--------|-------------------|--------|-------------------|--------|--------------------|--------|
|                                                                              |   | **(Dollars in thousands)** |   |
| Date of issue                                                                     |   | March 23, 2000             |   | May 11, 2004      |   | June 29, 2005     |   | September 21, 2006 |   |
| Amount of trust preferred securities issued                                       |   | $                          | 10,000 |              | $      | 6,000             |   | $                  | 10,000 |   | $ | 10,000 |   |
| Rate on trust preferred securities                                                |   | 10.875                     | %      | 8.28% (variable   | )      | 6.88              | %      | 6.83               | %      |
| Maturity                                                                          |   | March 8, 2030              |   | September 8, 2034 |   | November 23, 2035 |   | December 15, 2036  |   |
| Date of first redemption                                                          |   | March 8, 2010              |   | September 8, 2009 |   | August 23, 2010   |   | September 15, 2011 |   |
| Common equity securities issued                                                   |   | $                          | 310    |              | $      | 186               |   | $                  | 310    |   | $ | 310 |   |
| Junior subordinated deferrable interest debentures                        owed    |   | $                          | 10,310 |              | $      | 6,186             |   | $                  | 10,310 |   | $ | 10,310 |   |
| Rate on junior subordinated deferrable interest                        debentures |   | 10.875                     | %      | 8.28% (variable   | )      | 6.88              | %      | 6.83               | %      |

 

On the dates of issue indicated above, the Trusts, being Delaware            statutory business trusts, issued trust preferred securities (the “trust            preferred securities”) in the amount and at the rate indicated above. These            securities represent preferred beneficial interests in the assets of the Trusts. The            trust preferred securities will mature on the dates indicated, and are redeemable in            whole or in part at the option of Trinity at any time after the date of first            redemption indicated above, with the approval of the Federal Reserve Board and in whole            at any time upon the occurrence of certain events affecting their tax or regulatory            capital treatment. The Trusts also issued common equity securities to Trinity in the            amounts indicated above. The Trusts used the proceeds of the offering of the trust            preferred securities to purchase junior subordinated deferrable interest debentures            (the “debentures”) issued by Trinity, which have terms substantially            similar to the trust preferred securities. Trinity has the right to defer payments of            interest on the debentures at any time or from time to time for a period of up to ten            consecutive semi-annual periods with respect to each interest payment deferred. Under            the terms of the debentures, under certain circumstances of default or if Trinity has            elected to defer interest on the debentures, Trinity may not, with certain exceptions,            declare or pay any dividends or distributions on its capital stock or purchase or            acquire any of its capital stock. Trinity used the majority of the proceeds from the            sale of the debentures to add to Tier 1 or Tier 2 capital in order to support its            growth and to purchase treasury stock.

             

Trinity owns all of the outstanding common securities of the Trusts. The            Trusts are considered variable interest entities (VIEs) under*Financial Accounting Standards Board Interpretation (FIN)            No.* *46, “Consolidation            of Variable Interest Entities, an interpretation of Accounting Research Bulletin            No.* *51”*, as revised. Prior to FIN 46,            VIEs were generally consolidated by an enterprise when the enterprise had a controlling            financial interest through ownership of a majority of voting interest in the entity.            Under FIN 46, a VIE should be consolidated by its primary beneficiary. The Company            implemented FIN 46 during the fourth quarter of 2003. Because Trinity is not the            primary beneficiary of the Trusts, the financial statements of the Trusts are no longer            included in the consolidated financial statements of the Company. The Company’s            prior financial statements have been reclassified to de-consolidate the Company’s            investment in the Trusts.

             

In March 2005, the Board of Governors of the Federal Reserve System            issued a final rule allowing bank holding companies to continue to include            qualifying trust preferred securities in their Tier 1 Capital for regulatory capital            purposes, subject to a 25% limitation to all core (Tier I) capital elements, net of            goodwill less any associated deferred tax liability. The final rule provides a            five-year transition period, ending March 31, 2009, for application of the            aforementioned quantitative limitation. As of September 30, 2007, 81.0% of the trust            preferred securities noted in the table above qualified as Tier I capital and 19.0%            qualified as Tier 2 capital under the final rule adopted in            March 2005.

             

 

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Payments of distributions on the trust preferred securities and payments            on redemption of the trust preferred securities are guaranteed by Trinity on a limited            basis. Trinity also entered into an agreement as to expenses and liabilities with the            Trusts pursuant to which it agreed, on a subordinated basis, to pay any costs, expenses            or liabilities of the Trusts other than those arising under the trust preferred            securities. The obligations of Trinity under the junior subordinated debentures, the            related indenture, the trust agreement establishing the Trusts, the guarantee and the            agreement as to expenses and liabilities, in the aggregate, constitute a full and            unconditional guarantee by Trinity of the Trusts’ obligations under the trust            preferred securities.

             

Issuance costs of $406 thousand related to Trust I and Trust III were            deferred and are being amortized over the period until mandatory redemption of the            securities in March 2030 and September 2034, respectively. During the three            months periods ended September 30, 2007 and 2006, respectively, $3 thousand and $5            thousand of these issuance costs were amortized. During the nine months periods ended            September 30, 2007 and 2006, respectively, $10 thousand and $15 thousand of these            issuance costs were amortized. Unamortized issuance costs were $314 thousand and $325            thousand at September 30, 2007 and December 31, 2006, respectively. There were no            issuance costs associated with the other trust preferred security issues.

             

Dividends accrued and unpaid to securities holders totaled $209 thousand            and $488 thousand on September 30, 2007 and December 31, 2006, respectively.

 

**Note** **10.            Commitments, Contingencies and Off-Balance Sheet Activities**

 

*Credit-related financial instruments:*             The Company is a party to credit-related commitments with off-balance-sheet risk in the            normal course of business to meet the financing needs of its customers. These            credit-related commitments include commitments to extend credit, standby letters of            credit and commercial letters of credit. Such credit-related commitments involve, to            varying degrees, elements of credit and interest rate risk in excess of the amount            recognized in the consolidated balance sheets.

             

The Company’s exposure to credit loss is represented by the            contractual amount of these credit-related commitments. The Company follows the same            credit policies in making credit-related commitments as it does for on-balance-sheet            instruments.

             

At September 30, 2007 and December 31, 2006, the following            credit-related commitments were outstanding:

 
|                                       |   | **Contract Amount** |    |
|--------------------------------------------|--------|---------------------|---------|
|                                       |   | **September 30,**   |    | **December 31,** |   |
|                                       |   | **2007**            |    | **2006** |   |
|                                       |   | **(In thousands)**  |    |
| Unfunded commitments under lines of credit |   | $                   | 214,275 |   | $ | 192,252 |   |
| Commercial and standby letters of credit   |   | 23,277              |    | 31,100 |   |
|                                            |        |                     |         |  |  |  |  |

 

Commitments to extend credit under lines of credit are agreements to            lend to a customer as long as there is no violation of any condition established in the            contract. Commitments generally have fixed expiration dates or other termination            clauses and may require a payment of a fee. The commitments for lines of credit may            expire without being drawn upon. Therefore, the total commitment amounts do not            necessarily represent future cash requirements. The amount of collateral obtained, if            it is deemed necessary by the Company, is based on management’s credit evaluation            of the customer. Unfunded commitments under commercial lines of credit, revolving            credit lines and overdraft protection agreements are commitments for possible future            extensions of credit to existing customers. Overdraft protection agreements are            uncollateralized, but most other unfunded commitments under lines of credit have            collateral. These unfunded lines of credit usually do not contain a specified maturity            date and may not necessarily be drawn upon to the total extent to which the Company is            committed.

             

 

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Commercial and standby letters of credit are conditional credit-related            commitments issued by the Company to guarantee the performance of a customer to a third            party. Letters of credit are primarily issued to support public and private borrowing            arrangements. Essentially all letters of credit issued have expiration dates within one            year. The credit risk involved in issuing letters of credit is the same as that            involved in extending loans to customers. The Company holds collateral supporting            those credit-related commitments, if deemed necessary. In the event the            customer does not perform in accordance with the terms of the agreement with the third            party, the Company would be required to fund the credit-related commitment. The maximum            potential amount of future payments the Company could be required to make is            represented by the contractual amount shown in the summary above. If the credit-related            commitment is funded, the Company would be entitled to seek recovery from the customer.            At September 30, 2007 and December 31, 2006, no amounts have been recorded as            liabilities for the Company’s potential obligations under these credit-related            commitments. The fair value of these credit-related commitments is approximately equal            to the fees collected when granting these letters of credit. These fees collected were            $24 thousand and $66 thousand as of September 30, 2007 and December 31, 2006,            respectively, and are included in “other liabilities” on the            Company’s balance sheet.

             

*Concentrations of credit risk:*  The            majority of the loans, commitments to extend credit, and standby letters of credit have            been granted to customers in Los Alamos, Santa Fe and surrounding communities. Although            the Company has a diversified loan portfolio, a substantial portion of its loans are            made to businesses and individuals associated with, or employed by, Los Alamos National            Laboratory (“the Laboratory”) as further discussed within Item 1A of Part I            of Trinity’s Form 10-K for the year ended December 31, 2006, as amended in            Trinity’s Form 10-Q for the quarter ended June 30, 2007 filed on August 8, 2007            and as further amended by Item 1A herein. The ability of such borrowers to honor their            contracts is predominately dependent upon the continued operation and funding of the            Laboratory. Investments in securities issued by states and political subdivisions            involve governmental entities within the state of New Mexico. The distribution of            commitments to extend credit approximates the distribution of loans outstanding.            Standby letters of credit were granted primarily to commercial borrowers.

             

**Note            11. Litigation**

 

Trinity, the Bank, Title Guaranty, TCC Appraisals, TCC Advisors and TCC            Funds are not involved in any pending legal proceedings, other than routine legal            proceedings occurring in the normal course of business and those otherwise specifically            stated herein, which, in the opinion of management, in the aggregate, are material to            the Company’s consolidated financial condition.

 

 

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**Item            2. Management’s Discussion and Analysis of Financial Condition and Results of            Operations**

 

*This discussion is intended to focus on certain financial information            regarding the Company and is written to provide the reader with a more thorough            understanding of its financial statements. The following discussion and analysis of the            Company’s financial position and results of operations should be read in            conjunction with the information set forth in            Item* *3, Quantitative and            Qualitative Disclosures about Market Risk and the annual audited consolidated financial            statements filed on Form 10-K for the year ended December 31, 2006.*

             

This report contains certain financial information determined by methods            other than in accordance with accounting principles generally accepted in the United            States of America (GAAP). These measures include net interest margin on a fully            tax-equivalent basis and net interest income on a fully tax-equivalent basis.            Management uses these non-GAAP measures in its analysis of the Company’s            performance. The tax-equivalent adjustment to net interest margin and net interest            income recognizes the income tax savings when comparing taxable and tax-exempt assets            and adjusting for federal and state exemption of interest income and certain other            permanent income tax differences. Management believes that it is a standard practice in            the banking industry to present net interest income and net interest margin on a fully            tax-equivalent basis, and accordingly believes the presentation of the financial            measures may be useful for peer comparison purposes. This disclosure should not be            viewed as a substitute for the results determined to be in accordance with GAAP, nor is            it necessarily comparable to non-GAAP performance measures that may be presented by            other companies. Reconciliations of net interest income on a fully tax-equivalent basis            to net interest income and net interest margin on a fully tax-equivalent basis to net            interest margin are contained in tables under “Net Interest            Income.”

 

**Special Note Concerning Forward-Looking Statements**

 

This document (including information incorporated by reference)            contains, and future oral and written statements of the Company and its management may            contain, forward-looking statements, within the meaning of such term in the Private            Securities Litigation Reform Act of 1995, with respect to the financial condition,            results of operations, plans, objectives, future performance and business of the            Company. Forward-looking statements, which may be based upon beliefs, expectations and            assumptions of the Company’s management and on information currently available to            management, are generally identifiable by the use of words such as            “believe,” “expect,” “anticipate,”            “plan,” “intend,” “estimate,” “may,”            “will,” “would,” “could,” “should” or            other similar expressions. Additionally, all statements in this document, including            forward-looking statements, speak only as of the date they are made, and the Company            undertakes no obligation to update any statement in light of new information or future            events.

             

The Company’s ability to predict results or the actual effect of            future plans or strategies is inherently uncertain. The factors, which could have a            material adverse effect on the operations and future prospects of the Company, are            detailed in the “Risk Factors” section included under Item 1A of Part I of            the Company’s Form 10-K for the year ended December 31, 2006. In addition to the            risk factors described in that section, there are other factors that may impact any            public company, including the Company, which could have a material adverse effect on            the operations and future prospects of the Company. These additional factors include,            but are not limited to, the following:

             

             

             

             

             

These risks and uncertainties should be considered in evaluating            forward-looking statements and undue reliance should not be placed on such            statements.

             

 

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**Critical Accounting Policies**

 

***Allowance for Loan Losses:***  The            allowance for loan losses is that amount which, in management’s judgment, is            considered appropriate to provide for probable losses in the loan portfolio. In            analyzing the adequacy of the allowance for loan losses, management uses a            comprehensive loan grading system to determine risk potential in the portfolio, and            considers the results of periodic internal and external loan reviews. Historical loss            experience factors and specific reserves for impaired loans, combined with other            considerations, such as delinquency, non-accrual, trends on criticized and classified            loans, economic conditions, concentrations of credit risk, and experience and abilities            of lending personnel, are also considered in analyzing the adequacy of the allowance.            Management uses a systematic methodology, which is applied at least quarterly, to            determine the amount of allowance for loan losses and the resultant provisions for loan            losses it considers adequate to provide for anticipated loan losses. This methodology            includes a periodic detailed analysis of the loan portfolio, a systematic loan grading            system and a periodic review of the summary of the allowance for loan and lease loss            balance. In the event that different assumptions or conditions were to prevail, and            depending upon the severity of such changes, the possibility of materially different            financial condition or results of operations is a reasonable likelihood.

 

Management reviewed the methodology used in the allowance for loan            losses adequacy analysis in 2006. After a thorough examination, management refined the            process used in two ways: (1) by moving from a pure historical loss to a migration            analysis for determining inherent loss in the current loan portfolio and (2) by            quantifying the qualitative adjustments used to reflect the risks associated with            certain risk factors that are not reflected in the migration analysis or specific            identification of impaired loans.

             

Accordingly, three methods are used to evaluate the adequacy of the            allowance for loan losses: (1) specific identification, based on management’s            assessment of loans in the Bank’s portfolio and the probability that a charge-off            will occur in the upcoming quarter, per SFAS 114; (2) losses inherent in the loan            portfolio besides those specifically identified, based upon a migration analysis of the            percentage of loans currently performing that have inherent losses, as set forth in            SFAS 5; and (3) qualitative adjustments based on management’s assessment of            certain risks such as delinquency trends, watch-list and classified trends, changes in            concentrations, economic trends, industry trends, non-accrual trends, exceptions and            loan-to-value guidelines, management and staff changes and policy or procedure changes            (as set forth in SFAS 5).

             

While management uses the best information available to make its            evaluation, future adjustments to the allowance may be necessary if there are            significant changes in economic conditions. In addition, as an integral part of their            examination process regulatory agencies periodically review the Bank’s allowance            for loan losses and may require us to make additions to the allowance based on their            evaluation of information available at the time of their examinations.

             

***Mortgage Servicing Right (MSR)            Assets:***  Servicing residential mortgage loans for            third-party investors represents a significant business activity of the Bank. As of            September 30, 2007, mortgage loans serviced for others totaled $945.5 million. The MSRs            on these loans total $8.4 million as of September 30, 2007. The expected and actual            rates of mortgage loan prepayments are the most significant factors driving the value            of MSRs. Increases in mortgage loan prepayments reduce estimated future net servicing            cash flows because the life of the underlying loan is reduced. In determining the fair            value of the MSRs, mortgage interest rates, which are used to determine prepayment            rates and discount rates, are held constant over the estimated life of the portfolio.            Fair values of the MSRs are provided by an independent third-party broker of MSRs on a            monthly basis. The values given by the broker are based upon current market conditions            and assumptions, which incorporate the expected life of the loans, estimated costs to            service the loans, servicing fees to be received and other factors. MSRs are carried at            the lower of the initial capitalized amount, net of accumulated amortization, or fair            value.

             

The fair value of the MSRs is driven primarily by the effect current            mortgage interest rates have on the likelihood borrowers will prepay the underlying            mortgages by refinancing at a lower rate. Accordingly, higher interest rates decrease            the likelihood of prepayment, extending the life of the MSRs and increasing the value            of these assets. Lower interest rates increase the likelihood of prepayment,            contracting the life of the MSRs and decreasing the value of these assets. This can            have a significant impact on the Company’s income. There is no certainty on the            direction and amount of interest rate changes looking forward, and therefore, there is            no certainty on the amount or direction of the change in valuation.

 

 

14

----

 

 

 

An analysis of changes in mortgage servicing rights asset            follows:

 
|                                        | **Three Months Ended** |   | **Nine Months Ended** |   |
|---------------------------------------------|------------------------|--------|-----------------------|--------|
|                                        | **September 30,**      |   | **September 30,**     |   | **September 30,** |   | **September 30,** |   |
|                                        | **2007**               |   | **2006**              |   | **2007** |   | **2006** |   |
|                                        | **(In thousands)**     |
| Balance at beginning of period              | $                      | 9,123  |                  | $      | 10,460 |   | $ | 9,867 |   | $ | 11,009 |   |
| Servicing rights originated and capitalized | 278                    |   | 429                   |   | 949 |   | 1,236 |   |
| Amortization                                | (717                   | )      | (687                  | )      | (2,132 | ) | (2,043 | ) |
|                                        | $                      | 8,684  |                  | $      | 10,202 |   | $ | 8,684 |   | $ | 10,202 |   |

 

Below is an analysis of changes in the mortgage servicing right asset            valuation allowance:

 
|                                        | **Three Months Ended** |   | **Nine Months Ended** |   |
|---------------------------------------------|------------------------|--------|-----------------------|--------|
|                                        | **September 30,**      |   | **September 30,**     |   | **September 30,** |   | **September 30,** |   |
|                                        | **2007**               |   | **2006**              |   | **2007** |   | **2006** |   |
|                                        | **(In thousands)**     |
| Balance at beginning of period              | $                      | (433   | )                     | $      | (896 | ) | $ | (752 | ) | $ | (1,230 | ) |
| Aggregate reductions credited to operations | 121                    |   | 57                    |   | 574 |   | 391 |   |
| Aggregate additions charged to operations   | —                |   | (6                    | )      | (134 | ) | (6 | ) |
|                                        | $                      | (312   | )                     | $      | (845 | ) | $ | (312 | ) | $ | (845 | ) |

 

The fair values of the MSRs were $10.5 million, $9.5 million and $10.1            million on September 30, 2007, December 31, 2006 and September 30, 2006,            respectively.

 

The primary risk characteristics of the underlying loans used to            stratify the servicing assets for the purposes of measuring impairment are interest            rate and original term.

 

The Company’s valuation allowance is used to recognize impairments            of its MSRs. An MSR is considered impaired when the market value of the MSR is below            the amortized book value of the MSR. The MSRs are accounted by risk tranche, with the            interest rate and term of the underlying loan being the primary strata used in            distinguishing the tranches. Each tranche is evaluated separately for            impairment.

 

The Company employs an independent third party to analyze its MSRs for            impairment on a monthly basis. This independent third party analyzes the underlying            loans on all serviced loans and, based upon their knowledge of the value of MSRs that            are traded on the open market, they assign a current market value for each risk tranche            in the Company’s portfolio. The Company then compares that market value to the            current amortized book value for each tranche. The change in market value (up to the            amortized value of the MSR) is recorded as an adjustment to the MSR valuation            allowance, with the offset being recorded as an addition or a reduction to            income.

 

The independent third party used the following assumptions to calculate            the market value of the MSRs as of September 30, 2007, December 31, 2006 and September            30, 2006:

 
|                                                              |   | **At September 30, 2007** |   | **At December** **31,****2006** |   | **At September 30, 2006** |   |
|-------------------------------------------------------------------|--------|---------------------------|--------|--------------------------------------|--------|---------------------------|--------|
|                                                              |   |                      |   |
| Prepayment Standard                        Assumption (PSA) speed |   |                      | 188.00 | %                                    |   | 193.00                    | %      |   | 169.00 | % |
| Discount rate                                                     |   | 10.00                     |   | 10.00                                |   | 10.00                     |   |
| Earnings rate                                                     |   | 5.00                      |   | 5.00                                 |   | 5.00                      |   |
|                                                              |   |                      |   |                                 |   |                      |   |   |   |   |   |   |

 

 

15

----

 

 

 

**Overview**

 

The Company’s net income increased by $468 thousand (14.3%) from            the quarter ended June 30, 2007 to the quarter ended September 30, 2007. In addition,            the Company’s net income increased $662 thousand (21.6%) from the third quarter            of 2006 to the third quarter of 2007. The increase from the second quarter of 2007 and            the increase from the third quarter of 2006 was primarily due to an increase in net            interest income. Total assets grew $68.2 million (5.0%) from December 31, 2006 to            September 30, 2007. Net income for the nine months ended September 30, 2007 increased            by $1.5 million (18.1%) over the same period in 2006. This increase was primarily due            to an increase in net interest income.

             

**Results of Operations-Income Statement Analysis**

 

***General.***Net income for the third            quarter of 2007 increased to $3.7 million or $0.57 diluted earnings per share, compared            to $3.1 million or $0.46 diluted earnings per share for the same period in 2006, an            increase of $662 thousand (21.6%) in net income and an increase in earnings per share            of $0.11 (23.9%). This increase in net income was primarily due to an increase in net            interest income of $1.4 million, which was partially offset by an increase in            non-interest expense of $763 thousand. The increase in net interest income was due to            an increase in the volume of the interest-earning assets of the Bank, which was            partially offset by increases in the volume of interest-bearing liabilities. The            increase in non-interest expense was primarily due to an increase in salaries and            employee benefits. In addition, provision for loan losses decreased $272 thousand and            non-interest income decreased by $123 thousand. Income tax expenses increased $84            thousand due to increased taxable income.

             

Net income for the first nine months of 2007 totaled $10.1 million or            $1.53 diluted earnings per share, compared to $8.5 million or $1.29 diluted earnings            per share for the same period in 2006, an increase of $1.5 million (18.1%) in net            income and an increase of $0.24 (18.6%) in diluted earnings per share. This increase in            net income was primarily due to an increase in net interest income of $2.5 million and            a decrease in provision for loan losses of $972 thousand. The increase in net interest            income was primarily due to an increase in the volume of earning assets. Additionally,            the provision for loan losses decreased as indicated by the reserve for loan loss            analysis (see “Critical Accounting Policies—Allowance for Loan            Losses” above). In addition, non-interest expense increased by $1.4 million and            non-interest income decreased $119 thousand. The increase in non-interest expense was            mainly due to an increase in salaries and employee benefits expense. Income tax            expenses increased $424 thousand due to higher pre-tax income.

             

The profitability of the Company’s operations depends primarily on            its net interest income, which is the difference between total interest earned on            interest-earning assets and total interest paid on interest-bearing liabilities. The            Company’s net income is affected by its provision for loan losses as well as            other income and other expenses. The provision for loan losses reflects the amount            management believes to be adequate to cover probable credit losses in the loan            portfolio. Non-interest income or other income consists of mortgage loan servicing            fees, loan and other fees, service charges on deposits, gain on sale of loans, gain on            sale of securities and other operating income. Other expenses include salaries and            employee benefits, occupancy expenses, data processing expenses, marketing,            amortization and valuation of mortgage servicing rights, supplies expense, loss on            other real estate owned, postage and other expenses.

             

The amount of net interest income is affected by changes in the volume            and mix of interest-earning assets, the level of interest rates earned on those assets,            the volume and mix of interest-bearing liabilities, and the level of interest rates            paid on those interest-bearing liabilities. The provision for loan losses is dependent            on changes in the loan portfolio and management’s assessment of the            collectability of the loan portfolio, as well as economic and market conditions. Other            income and other expenses are impacted by growth of operations and growth in the number            of accounts through both acquisitions and core banking business growth. Growth in            operations affects other expenses as a result of additional employees, branch            facilities and promotional marketing expenses. Growth in the number of accounts affects            other income including service fees as well as other expenses such as computer            services, supplies, postage, telecommunications and other miscellaneous            expenses.

             

 

16

----

 

 

 

***Net Interest Income.***The following            tables present, for the periods indicated, the total dollar amount of interest income            from average interest-earning assets and the resultant yields, as well as the interest            expense on average interest-bearing liabilities, and the resultant costs, expressed            both in dollars and rates:

 
|                                                                                               | **Three months ended September 30,** |      |
|----------------------------------------------------------------------------------------------------|--------------------------------------|-----------|
|                                                                                               | **2007**                             |      | **2006** |   |
|                                                                                               | **Average Balance**                  |      | **Interest** |   | **Yield/**

**Rate** |   |   | **Average Balance** |   | **Interest** |   | **Yield/**

**Rate** |   |
|                                                                                               | **(Dollars in thousands)**           |      |
| **Interest-earning Assets:**                                                                       |                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                                                        | $                                    | 1,169,302 |   | $ | 22,700 |   | 7.70 | % |   | $ | 1,115,681 |   | $ | 20,513 |   | 7.29 | % |
| Taxable investment securities                                                                      |                                 | 131,652   |   |   | 1,658 |   | 5.00 |   |   |   | 78,405 |   |   | 832 |   | 4.21 |   |
| Investment securities exempt from federal income taxes                        (3)                  |                                 | 19,376    |   |   | 274 |   | 5.61 |   |   |   | 16,335 |   |   | 298 |   | 7.24 |   |
| Federal funds sold                                                                                 |                                 | 1,004     |   |   | 23 |   | 9.09 |   |   |   | 271 |   |   | 6 |   | 8.78 |   |
| Other interest-bearing deposits                                                                    |                                 | 31,493    |   |   | 407 |   | 5.13 |   |   |   | 12,000 |   |   | 155 |   | 5.12 |   |
| Investment in unconsolidated trust subsidiaries                                                    |                                 | 1,116     |   |   | 23 |   | 8.18 |   |   |   | 1,093 |   |   | 22 |   | 7.99 |   |
| Total interest-earning assets                                                                      |                                 | 1,353,943 |   |   | 25,085 |   | 7.35 |   |   |   | 1,223,785 |   |   | 21,826 |   | 7.08 |   |
| Non-interest-earning assets                                                                        |                                 | 74,683    |   |   |   |   |   |   |   |   | 61,820 |   |   |   |   |   |   |
| Total assets                                                                                       | $                                    | 1,428,626 |   |   |   |   |   |   |   | $ | 1,285,605 |   |   |   |   |   |   |
|                                                                                               |                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing Liabilities:**                                                                  |                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                          |                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW deposits                                                                                       | $                                    | 97,051    |   | $ | 607 |   | 2.48 | % |   | $ | 84,817 |   | $ | 468 |   | 2.19 | % |
| Money market deposits                                                                              |                                 | 196,526   |   |   | 1,185 |   | 2.39 |   |   |   | 161,549 |   |   | 747 |   | 1.83 |   |
| Savings deposits                                                                                   |                                 | 274,888   |   |   | 1,977 |   | 2.85 |   |   |   | 259,639 |   |   | 1,643 |   | 2.51 |   |
| Time deposits over $100,000                                                                        |                                 | 335,810   |   |   | 4,401 |   | 5.20 |   |   |   | 304,998 |   |   | 3,750 |   | 4.88 |   |
| Time deposits under $100,000                                                                       |                                 | 220,081   |   |   | 2,783 |   | 5.02 |   |   |   | 189,912 |   |   | 2,148 |   | 4.49 |   |
| Short-term borrowings, including ESOP borrowings under 1                        year               |                                 | 32,750    |   |   | 341 |   | 4.13 |   |   |   | 20,509 |   |   | 247 |   | 4.78 |   |
| Long-term borrowings, including ESOP borrowings over 1                        year                 |                                 | 30,972    |   |   | 289 |   | 3.70 |   |   |   | 64,357 |   |   | 623 |   | 3.84 |   |
| Junior subordinated debt owed to unconsolidated                        trusts                      |                                 | 37,116    |   |   | 765 |   | 8.18 |   |   |   | 36,354 |   |   | 760 |   | 8.29 |   |
| Total interest-bearing liabilities                                                                 |                                 | 1,225,194 |   |   | 12,348 |   | 4.00 |   |   |   | 1,122,135 |   |   | 10,386 |   | 3.67 |   |
| Demand deposits--non-interest-bearing                                                              |                                 | 41,215    |   |   |   |   |   |   |   |   | 38,265 |   |   |   |   |   |   |
| Other non-interest-bearing liabilities                                                             |                                 | 76,129    |   |   |   |   |   |   |   |   | 43,701 |   |   |   |   |   |   |
| Stockholders' equity, including stock owned by                        ESOP                         |                                 | 86,088    |   |   |   |   |   |   |   |   | 81,504 |   |   |   |   |   |   |
| Total liabilities and stockholders equity                                                          | $                                    | 1,428,626 |   |   |   |   |   |   |   | $ | 1,285,605 |   |   |   |   |   |   |
| Net interest income on a fully tax-equivalent basis/interest                        rate Spread(4) |                                 |      |   | $ | 12,737 |   | 3.35 | % |   |   |   |   | $ | 11,440 |   | 3.40 | % |
| Net interest margin on a fully tax-equivalent                        basis(5)                      |                                 |      |   |   |   |   | 3.73 | % |   |   |   |   |   |   |   | 3.71 | % |
| Net interest margin(5)                                                                             |                                 |      |   |   |   |   | 3.72 | % |   |   |   |   |   |   |   | 3.67 | % |

________________
| (1) | Includes non-accrual loans of $10.9 million and $8.0 million                        for September 30, 2007 and 2006, respectively. |
|-----|------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Interest income includes loan origination fees of $851                        thousand and $665 thousand for the three months ended September 30, 2007                        and 2006, respectively. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Non-taxable investment income is presented on a fully                        tax-equivalent basis, adjusting for federal and state exemption of interest                        income and certain other permanent tax differences. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Interest rate spread represents the difference between the                        average yield on interest-earning assets and the average cost of                        interest-bearing liabilities and is presented on a fully tax-equivalent                        basis. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

17

----

 

 

 
| (5) | Net interest margin represents net interest income as a                        percentage of average interest-earning assets. |
|-----|-------------------------------------------------------------------------------------------------------------------------------|

             

For the third quarter of 2007, net interest income on a fully            tax-equivalent basis increased $1.3 million (11.3%) to $12.7 million from $11.4 million            for the third quarter of 2006. The increase in net interest income resulted from an            increase in interest income on a fully tax-equivalent basis of $3.3 million (14.9%),            which was partially offset by an increase in interest expense of $2.0 million (18.9%).            Interest income increased mainly due to an increase in average interest-earning assets            of $130.2 million (10.6%), which accounted for an increase of $2.0 million in interest            income on a fully tax-equivalent basis. There was also an increase in the yield on            interest-earning assets of 27 basis points, which accounted for an increase in interest            income on a fully tax-equivalent basis of $1.3 million. Interest expense increased due            to an increase in the cost of interest-bearing liabilities of 33 basis points, which            accounted for $1.0 million of the increase, and an increase in average total            interest-bearing liabilities of $103.1 million (9.2%), accounting for an additional            $1.0 million of the increase in interest expense. The net interest margin expressed on            a fully tax-equivalent basis increased 2 basis points to 3.73% for the quarter ended            September 30, 2007 from 3.71% for the quarter ended September 30, 2006.

 

18

----

 

 

 
|                                                                                               | **Nine months ended September 30,** |      |
|----------------------------------------------------------------------------------------------------|-------------------------------------|-----------|
|                                                                                               | **2007**                            |      | **2006** |   |
|                                                                                               | **Average Balance**                 |      | **Interest** |   | **Yield/**

**Rate** |   |   | **Average Balance** |   | **Interest** |   | **Yield/**

**Rate** |   |
|                                                                                               | **(Dollars in thousands)**          |      |
| **Interest-earning Assets:**                                                                       |                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                                                        | $                                   | 1,162,860 |   | $ | 66,864 |   | 7.69 | % |   | $ | 1,078,343 |   | $ | 58,128 |   | 7.21 | % |
| Taxable investment securities                                                                      |                                | 96,328    |   |   | 3,466 |   | 4.81 |   |   |   | 89,340 |   |   | 2,732 |   | 4.09 |   |
| Investment securities exempt from federal income taxes                        (3)                  |                                | 23,475    |   |   | 1,319 |   | 7.51 |   |   |   | 18,005 |   |   | 940 |   | 6.98 |   |
| Federal funds sold                                                                                 |                                | 1,224     |   |   | 60 |   | 6.55 |   |   |   | 262 |   |   | 11 |   | 5.61 |   |
| Other interest-bearing deposits                                                                    |                                | 33,107    |   |   | 1,291 |   | 5.21 |   |   |   | 8,725 |   |   | 308 |   | 4.72 |   |
| Investment in unconsolidated trust subsidiaries                                                    |                                | 1,116     |   |   | 69 |   | 8.27 |   |   |   | 1,026 |   |   | 66 |   | 8.60 |   |
| Total interest-earning assets                                                                      |                                | 1,318,110 |   |   | 73,069 |   | 7.41 |   |   |   | 1,195,601 |   |   | 62,185 |   | 6.95 |   |
| Non-interest-earning assets                                                                        |                                | 63,296    |   |   |   |   |   |   |   |   | 60,412 |   |   |   |   |   |   |
| Total assets                                                                                       | $                                   | 1,381,406 |   |   |   |   |   |   |   | $ | 1,256,013 |   |   |   |   |   |   |
|                                                                                               |                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing Liabilities:**                                                                  |                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                          |                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW deposits                                                                                       | $                                   | 95,578    |   | $ | 1,789 |   | 2.50 | % |   | $ | 84,791 |   | $ | 1,233 |   | 1.94 | % |
| Money market deposits                                                                              |                                | 195,531   |   |   | 3,480 |   | 2.38 |   |   |   | 160,201 |   |   | 2,194 |   | 1.83 |   |
| Savings deposits                                                                                   |                                | 246,538   |   |   | 4,927 |   | 2.67 |   |   |   | 256,149 |   |   | 4,159 |   | 2.17 |   |
| Time deposits over $100,000                                                                        |                                | 340,563   |   |   | 13,299 |   | 5.22 |   |   |   | 288,728 |   |   | 9,632 |   | 4.46 |   |
| Time deposits under $100,000                                                                       |                                | 217,358   |   |   | 8,135 |   | 5.00 |   |   |   | 178,885 |   |   | 5,528 |   | 4.13 |   |
| Short-term borrowings, including ESOP borrowings under 1                        year               |                                | 11,434    |   |   | 360 |   | 4.21 |   |   |   | 20,523 |   |   | 666 |   | 4.34 |   |
| Long-term borrowings, including ESOP borrowings over 1                        year                 |                                | 52,811    |   |   | 1,512 |   | 3.83 |   |   |   | 65,707 |   |   | 1,931 |   | 3.93 |   |
| Junior subordinated debt owed to unconsolidated                        trusts                      |                                | 37,116    |   |   | 2,292 |   | 8.26 |   |   |   | 34,125 |   |   | 2,224 |   | 8.29 |   |
| Total interest-bearing liabilities                                                                 |                                | 1,196,929 |   |   | 35,794 |   | 4.00 |   |   |   | 1,089,109 |   |   | 27,567 |   | 3.38 |   |
| Demand deposits--non-interest-bearing                                                              |                                | 39,173    |   |   |   |   |   |   |   |   | 39,598 |   |   |   |   |   |   |
| Other non-interest-bearing liabilities                                                             |                                | 60,691    |   |   |   |   |   |   |   |   | 47,686 |   |   |   |   |   |   |
| Stockholders' equity, including stock owned by                        ESOP                         |                                | 84,613    |   |   |   |   |   |   |   |   | 79,620 |   |   |   |   |   |   |
| Total liabilities and stockholders equity                                                          | $                                   | 1,381,406 |   |   |   |   |   |   |   | $ | 1,256,013 |   |   |   |   |   |   |
| Net interest income on a fully tax-equivalent basis/interest                        rate Spread(4) |                                |      |   | $ | 37,275 |   | 3.41 | % |   |   |   |   | $ | 34,618 |   | 3.57 | % |
| Net interest margin on a fully tax-equivalent                        basis(5)                      |                                |      |   |   |   |   | 3.78 | % |   |   |   |   |   |   |   | 3.87 | % |
| Net interest margin(5)                                                                             |                                |      |   |   |   |   | 3.73 | % |   |   |   |   |   |   |   | 3.83 | % |

________________
| (1) | Includes non-accrual loans of $9.8 million and $8.0 million                        for September 30, 2007 and 2006, respectively. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------|
| (2) | Interest income includes loan origination fees of $2.5                        million for each of the nine months ended September 30, 2007 and                        2006. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Non-taxable investment income is presented on a fully                        tax-equivalent basis, adjusting for federal and state exemption of interest                        income and certain other permanent tax differences. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Interest rate spread represents the difference between the                        average yield on interest-earning assets and the average cost of                        interest-bearing liabilities and is presented on a fully tax-equivalent                        basis. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | Net interest margin represents net interest income as a                        percentage of average interest-earning assets. |
|-----|-------------------------------------------------------------------------------------------------------------------------------|

 

19

----

 

 

 

For the nine months ended September 30, 2007, net interest income on a            fully tax-equivalent basis increased $2.7 million (7.7%) to $37.3 million from $34.6            million for the nine months ended September 30, 2006. The increase in net interest            income resulted from an increase in interest income on a fully tax-equivalent basis of            $10.9 million (17.5%), which was partially offset by an increase in interest expense of            $8.2 million (29.8%). The increase in interest income on a fully tax-equivalent basis            was mainly due to an increase in average interest-earning assets of $122.5 million            (10.2%), which accounted for $6.3 million of the increase. There was also an increase            on the yield of interest-earning assets of 46 basis points, which increased interest            income on a fully tax-equivalent basis by $4.6 million. The increase in interest            expense was due to an increase in the yield on interest-bearing liabilities of 62 basis            points, which accounted for an increase in interest expense of $4.9 million. In            addition, the average interest-bearing liabilities increased a total of $107.8 million            (9.9%), which increased interest expense by $3.3 million. The net interest margin            expressed on a fully tax-equivalent basis decreased 9 basis points to 3.78% for the            nine month period ended September 30, 2007 from 3.87% for the same period in            2006.

 

The following table reconciles net interest income on a fully            tax-equivalent basis for the periods presented:

 
|                                             |   | **Three Months Ended September 30,** |   |   |   | **Nine Months Ended September 30,** |   |
|--------------------------------------------------|--------|--------------------------------------|--------|--------|--------|-------------------------------------|--------|
|                                             |   | **2007**                             |   |   |   | **2006**                            |   |   |   | **2007** |   |   |   | **2006** |   |
|                                             |   | **(In thousands)**                   |   |
| Net interest income                              |   | $                                    | 12,691 |   |   |                                | $      | 11,331 |   |   |   | $ | 36,748 |   |   |   | $ | 34,269 |   |
| Tax-equivalent adjustment to net interest income |   |                                 | 46     |   |   |                                |   | 109 |   |   |   |   | 527 |   |   |   |   | 349 |   |
| Net interest income, fully tax-equivalent basis  |   | $                                    | 12,737 |   |   |                                | $      | 11,440 |   |   |   | $ | 37,275 |   |   |   | $ | 34,618 |   |

 

 

20

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***Volume, Mix and Rate Analysis of Net Interest            Income.***The following tables present the extent to which            changes in volume, changes in interest rates, and changes in the interest rates times            the changes in volume of interest-earning assets and interest-bearing liabilities have            affected the Company’s interest income and interest expense during the periods            indicated. Information is provided on changes in each category due to (i) changes            attributable to changes in volume (change in volume times the prior period interest            rate), (ii) changes attributable to changes in interest rate (changes in rate            times the prior period volume) and (iii) changes attributable to changes in            rate/volume (changes in interest rate times changes in volume). Changes attributable to            the combined impact of volume and rate have been allocated proportionally to the            changes due to volume and the changes due to rate.

 
|                                                                                 | **Three Months Ended September 30,** |   |   | **Nine Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------|--------------------------------------|--------|--------|-------------------------------------|--------|
|                                                                                 | **2007 Compared to 2006**            |   |   | **2007 Compared to 2006**           |   |
|                                                                                 | **Change**

**Due to Volume**        |   |   | **Change Due to Rate**              |   |   | **Total Change** |   |   | **Change Due to Volume** |   |   | **Change**

**Due to Rate** |   |   | **Total Change** |   |
|                                                                                 | **(In thousands)**                   |   |
| **Interest-earning Assets:**                                                         |                                 |   |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                                                                | $                                    | 1,011  |   |                                | $      | 1,176 |   |   | $ | 2,187 |   |   | $ | 4,720 |   |   | $ | 4,016 |   |   | $ | 8,736 |   |
| Taxable investment securities                                                        |                                 | 648    |   |                                |   | 178 |   |   |   | 826 |   |   |   | 229 |   |   |   | 505 |   |   |   | 734 |   |
| Investment securities exempt from federal income                        taxes(1)     |                                 | 50     |   |                                |   | (74 | ) |   |   | (24 | ) |   |   | 303 |   |   |   | 76 |   |   |   | 379 |   |
| Federal funds sold                                                                   |                                 | 17     |   |                                |   | 0 |   |   |   | 17 |   |   |   | 47 |   |   |   | 2 |   |   |   | 49 |   |
| Other interest bearing deposits                                                      |                                 | 252    |   |                                |   | 0 |   |   |   | 252 |   |   |   | 948 |   |   |   | 35 |   |   |   | 983 |   |
| Investment in unconsolidated trust subsidiaries                                      |                                 | 0      |   |                                |   | 1 |   |   |   | 1 |   |   |   | 6 |   |   |   | (3 | ) |   |   | 3 |   |
| Total increase in interest income                                                    | $                                    | 1,978  |   |                                | $      | 1,281 |   |   | $ | 3,259 |   |   | $ | 6,253 |   |   | $ | 4,631 |   |   | $ | 10,884 |   |
| **Interest-bearing Liabilities:**                                                    |                                 |   |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Now deposits                                                                         | $                                    | 73     |   |                                | $      | 66 |   |   | $ | 139 |   |   | $ | 171 |   |   | $ | 385 |   |   | $ | 556 |   |
| Money market deposits                                                                |                                 | 182    |   |                                |   | 256 |   |   |   | 438 |   |   |   | 546 |   |   |   | 740 |   |   |   | 1,286 |   |
| Savings deposits                                                                     |                                 | 100    |   |                                |   | 234 |   |   |   | 334 |   |   |   | (161 | ) |   |   | 929 |   |   |   | 768 |   |
| Time deposits over $100,000                                                          |                                 | 393    |   |                                |   | 258 |   |   |   | 651 |   |   |   | 1,880 |   |   |   | 1,787 |   |   |   | 3,667 |   |
| Time deposits under $100,000                                                         |                                 | 364    |   |                                |   | 271 |   |   |   | 635 |   |   |   | 1,316 |   |   |   | 1,291 |   |   |   | 2,607 |   |
| Short-term borrowings, including ESOP borrowings under 1                        year |                                 | 132    |   |                                |   | (38 | ) |   |   | 94 |   |   |   | (285 | ) |   |   | (21 | ) |   |   | (306 | ) |
| Long-term borrowings, including ESOP borrowings under 1                        year  |                                 | (313   | )      |                                |   | (21 | ) |   |   | (334 | ) |   |   | (370 | ) |   |   | (49 | ) |   |   | (419 | ) |
| Junior subordinated debt owed to unconsolidated                        trusts        |                                 | 16     |   |                                |   | (11 | ) |   |   | 5 |   |   |   | 189 |   |   |   | (121 | ) |   |   | 68 |   |
| Total increase in interest expense                                                   | $                                    | 947    |   |                                | $      | 1,015 |   |   | $ | 1,962 |   |   | $ | 3,286 |   |   | $ | 4,941 |   |   | $ | 8,227 |   |
| Increase in net interest income                                                      | $                                    | 1,031  |   |                                | $      | 266 |   |   | $ | 1,297 |   |   | $ | 2,967 |   |   | $ | (310 | ) |   | $ | 2,657 |   |

_______________
| (1) | Non-taxable investment income is presented on a fully                        tax-equivalent basis, adjusting for federal and state exemption of interest                        income and certain other permanent income tax differences. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

21

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***Other Income.***Changes in other            income between the three months ended September 30, 2007 and 2006, and between the nine            months ended September 30, 2007 and 2006, were as follows:

 
|                         | **Three Months Ended**

**September 30,** |   |   | **Net**  |   |    | **Nine Months Ended**

**September 30,** |   |   | **Net**  |   |
|------------------------------|-------------------------------------------|--------|--------|----------|--------|---------|------------------------------------------|--------|--------|----------|--------|
|                         | **2007**                                  |   |   | **2006** |   |    | **difference**                           |   |   | **2007** |   | **2006** |   |   | **difference** |   |
|                         | **(In thousands)**                        |   |
| Other income:                |                                      |   |   |     |   |    |                                     |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loan servicing fees | $                                         | 606    |   |     | $      | 662     |                                     |   | $      | (56      | )      |   | $ | 1,859 |   | $ | 1,969 |   |   | $ | (110 | ) |
| Loan and other fees          |                                      | 884    |   |     |   | 732     |                                     |   |   | 152      |   |   |   | 2,577 |   |   | 2,253 |   |   |   | 324 |   |
| Service charges on deposits  |                                      | 441    |   |     |   | 386     |                                     |   |   | 55       |   |   |   | 1,263 |   |   | 1,164 |   |   |   | 99 |   |
| Gain on sale of loans        |                                      | 347    |   |     |   | 538     |                                     |   |   | (191     | )      |   |   | 1,284 |   |   | 1,429 |   |   |   | (145 | ) |
| Gain on sale of securities   |                                      | 62     |   |     |   | — |                                     |   |   | 62       |   |   |   | 62 |   |   | — |   |   |   | 62 |   |
| Other operating income       |                                      | 313    |   |     |   | 458     |                                     |   |   | (145     | )      |   |   | 911 |   |   | 1,260 |   |   |   | (349 | ) |
|                         | $                                         | 2,653  |   |     | $      | 2,776   |                                     |   | $      | (123     | )      |   | $ | 7,956 |   | $ | 8,075 |   |   | $ | (119 | ) |

 

In the third quarter of 2007, other income decreased $123 thousand            (4.4%) from the same period in 2006, to a total of $2.7 million, down from $2.8            million. Gain on sale of loans decreased $191 thousand (35.5%) due to a lower volume of            loan sales. Other operating income decreased $145 thousand (31.7%), mainly due to a            decrease in title insurance premiums collected resultant from lower volume of policies            written due to a general slow down in the real estate market. Loan and other fees            increased by $152 thousand (20.8%), mainly due to an increase in fees collected from            ATM operations due largely to higher foreign (non-Bank customer)            transactions.

 

In the first nine months of 2007, other income decreased $119 thousand            (1.5%) from the same period in 2006, to a total of $8.0 million, down from $8.1            million. Other operating income decreased $349 thousand (27.7%), mainly due to a            decrease in title insurance premiums collected resultant from lower volume of policies            written due to a general slow down in the real estate market. Loan and other fees            increased $324 thousand (14.4%), mainly due to an increase in fees collected from ATM            operations due largely to higher foreign (non-Bank customer) transactions. Gain on sale            of loans decreased $145 thousand (10.1%) due to a lower volume of loan            sales.

             

***Other Expenses.***Changes in other            expenses between the three months ended September 30, 2007 and 2006 and the nine months            ended September 30, 2007 and 2006 were as follows:

 
|                                                                           | **Three Months Ended**

**September 30,** |   |   | **Net**  |   |   | **Nine Months Ended**

**September 30,** |   |   | **Net**  |   |
|--------------------------------------------------------------------------------|-------------------------------------------|--------|--------|----------|--------|--------|------------------------------------------|--------|--------|----------|--------|
|                                                                           | **2007**                                  |   |   | **2006** |   |   | **difference**                           |   |   | **2007** |   | **2006** |   |   | **difference** |   |
|                                                                           | **(In thousands)**                        |   |
| Other expenses:                                                                |                                      |   |   |     |   |   |                                     |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                                 | $                                         | 4,559  |   |     | $      | 4,065  |                                     |   | $      | 494      |   |   | $ | 13,763 |   | $ | 12,913 |   |   | $ | 850 |   |
| Occupancy                                                                      |                                      | 964    |   |     |   | 836    |                                     |   |   | 128      |   |   |   | 2,880 |   |   | 2,521 |   |   |   | 359 |   |
| Data processing                                                                |                                      | 498    |   |     |   | 448    |                                     |   |   | 50       |   |   |   | 1,349 |   |   | 1,343 |   |   |   | 6 |   |
| Marketing                                                                      |                                      | 528    |   |     |   | 441    |                                     |   |   | 87       |   |   |   | 1,568 |   |   | 1,382 |   |   |   | 186 |   |
| Amortization and valuation of mortgage servicing                        rights |                                      | 596    |   |     |   | 636    |                                     |   |   | (40      | )      |   |   | 1,692 |   |   | 1,658 |   |   |   | 34 |   |
| Supplies                                                                       |                                      | 61     |   |     |   | 140    |                                     |   |   | (79      | )      |   |   | 595 |   |   | 490 |   |   |   | 105 |   |
| (Gain) on sale of other real estate owned                                      |                                      | (92    | )      |     |   | 8      |                                     |   |   | (100     | )      |   |   | (122 | ) |   | 240 |   |   |   | (362 | ) |
| Postage                                                                        |                                      | 134    |   |     |   | 142    |                                     |   |   | (8       | )      |   |   | 464 |   |   | 445 |   |   |   | 19 |   |
| Other                                                                          |                                      | 1,370  |   |     |   | 1,139  |                                     |   |   | 231      |   |   |   | 3,761 |   |   | 3,589 |   |   |   | 172 |   |
|                                                                           | $                                         | 8,618  |   |     | $      | 7,855  |                                     |   | $      | 763      |   |   | $ | 25,950 |   | $ | 24,581 |   |   | $ | 1,369 |   |

 

For the third quarter of 2007, other expenses increased $763 thousand            (9.7%) from the third quarter of 2006, from $7.9 million in 2006 to $8.6 million in            2007. Salaries and employee benefits increased $494 thousand (12.2%), mainly due to an            increase of seven full-time equivalent employees (a 2.5% increase) from 280 in 2006 to            287 in 2007 and an increase in compensation per employee. The additional employees were            added to support asset growth between the two periods (of $90.8 million, or 6.8%).            Other expenses grew $231 thousand (20.3%) mainly due to an increase in audit and            examination fees and legal fees. Occupancy expenses increased $128 thousand (15.3%),            mainly due to lease expense for land leased in Santa Fe for the building of a new            office, as well as an increase in supplies related to the maintenance of the existing            facilities. The expense on the lease is offset by interest income on a mortgage loan in            favor of Trinity secured by the property.

 

 

22

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For the nine months ended September 30, 2007, other expenses increased            $1.4 million (5.6%) to $26.0 million from $24.6 million in the first nine months of            2006. This increase was largely due to an increase in salaries and employee benefits of            $850 thousand (6.6%), mainly due to an increase in the number of full-time equivalent            employees and an increase in compensation per employee. (Gain) loss on sale of other            real estate owned decreased $362 thousand (150.8%) mainly due to a drop in the sale            activity in other real estate owned between the two periods, as well as a recovery on            previously recorded losses on the sale of other real estate owned where the financing            was made at below-market rates. Occupancy expense increased $186 thousand (13.6%)            mainly due to the lease expense on the land leased in Santa Fe for the construction of            a third office in Santa Fe. This expense is offset by interest income on a mortgage            loan in favor of Trinity secured by the property.

***Income Taxes.***In the third quarter            of 2007, income tax expense increased $84 thousand (4.5%) over the third quarter of            2006, remaining at $1.9 million. The effective tax rate decreased to 34.2% in the third            quarter of 2007 compared to 37.7% in the third quarter of 2006. The decrease was mainly            attributable to a change in the estimation of current income tax expense.

 

In the nine months ended September 30, 2007, income tax expense            increased $424 thousand (8.3%), to a total of $5.6 million compared to $5.1 million for            the same period for the previous year. The effective tax rate decreased to 35.6% in the            first nine months of 2007, compared to 37.6% in the first nine months of 2006. The            decrease was mainly attributable to a change in the estimation of current income tax            expense.

 

**Financial Condition-Balance Sheet Analysis**

 

***General.***Total assets at September            30, 2007 were $1.4 billion, an increase of $68.2 million (5.0%) from December 31,            2006. Net loans accounted for most of this change, increasing $50.2 million (4.5%)            during the first nine months of 2007. During the same period, total liabilities            increased by $61.4 million (4.8%), remaining at $1.3 billion. The increase in total            liabilities was primarily due to an increase in deposits of $64.2 million (5.5%).            Stockholders’ equity (including stock owned by the Employee Stock Ownership Plan)            increased $6.8 million (8.5%) to $87.5 million on September 30, 2007 compared to $80.7            million on December 31, 2006.

 

***Investment Securities.***The primary            purposes of the investment portfolio are to provide a source of earnings for the            purpose of managing liquidity, to provide collateral to pledge against public deposits            and to control interest rate risk. In managing the portfolio, the Company seeks to            obtain the objectives of safety of principal, liquidity, diversification and maximized            return on funds. For an additional discussion with respect to these matters, see            “Liquidity and Sources of Capital” under Item 2 and “Asset            Liability Management” under Item 3 below.

             

The following tables set forth the amortized cost and fair value of the            Company’s securities by accounting classification category and by type of            security as indicated:

 
|                                                                                   |   | **At September 30, 2007** |    | **At December** **31, 2006** |   | **At September 30, 2006** |   |
|----------------------------------------------------------------------------------------|--------|---------------------------|---------|-----------------------------------|--------|---------------------------|--------|
|                                                                                   |   | **Amortized**             |    |                              |   | **Amortized**             |   |   |   | **Amortized** |   |   |   |
|                                                                                   |   | **Cost**                  |    | **Fair Value**                    |   | **Cost**                  |   | **Fair Value** |   | **Cost** |   | **Fair Value** |   |
|                                                                                   |   | **(In thousands)**        |    |
| Investment securities Available for Sale:                                              |   |                      |    |                              |   |                      |   |   |   |   |   |   |   |
| Government sponsored agencies                                                          |   | $                         | 128,385 |                              | $      | 128,438                   |   | $ | 73,025 |   | $ | 72,787 |   | $ | 66,494 |   | $ | 66,106 |   |
| States and political subdivisions                                                      |   | 6,396                     |    | 6,328                             |   | 15,190                    |   | 15,157 |   | 9,532 |   | 9,553 |   |
| Equity securities                                                                      |   | 1                         |    | 6                                 |   | 1                         |   | 6 |   | 1 |   | 5 |   |
| Total investment securities available for sale                                         |   | $                         | 134,782 |                              | $      | 134,772                   |   | $ | 88,216 |   | $ | 87,950 |   | $ | 76,027 |   | $ | 75,664 |   |
| Investment securities Held to Maturity:                                                |   |                      |    |                              |   |                      |   |   |   |   |   |   |   |
| States and political subdivisions                                                      |   | $                         | 9,372   |                              | $      | 9,372                     |   | $ | 10,968 |   | $ | 10,961 |   | $ | 11,179 |   | $ | 11,171 |   |
| Total investment securities held to maturity                                           |   | $                         | 9,372   |                              | $      | 9,372                     |   | $ | 10,968 |   | $ | 10,961 |   | $ | 11,179 |   | $ | 11,171 |   |
| Other investments:                                                                     |   |                      |    |                              |   |                      |   |   |   |   |   |   |   |
| Non-marketable equity securities (including FRB and FHLB                        stock) |   | $                         | 6,711   |                              | $      | 6,711                     |   | $ | 6,820 |   | $ | 6,820 |   | $ | 8,000 |   | $ | 8,000 |   |
| Investment in unconsolidated trusts                                                    |   | 1,116                     |    | 1,116                             |   | 1,116                     |   | 1,116 |   | 1,302 |   | 1,302 |   |
| Total other investments                                                                |   | $                         | 7,827   |                              | $      | 7,827                     |   | $ | 7,936 |   | $ | 7,936 |   | $ | 9,302 |   | $ | 9,302 |   |

             

 

23

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***Loan Portfolio.***The following tables            set forth the composition of the loan portfolio:

 
|                      |   | **At September 30, 2007**  |      | **At December 31, 2006** |   | **At September 30, 2006** |   |
|---------------------------|--------|----------------------------|-----------|--------------------------|--------|---------------------------|--------|
|                      |   | **Amount**                 |      | **Percent**              |   | **Amount**                |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                      |   | **(Dollars in thousands)** |      |
| Commercial                |   | $                          | 122,162   |                     | 10.31  | %                         | $      | 127,950 |   | 11.29 | % | $ | 114,997 |   | 10.20 | % |
| Commercial real estate    |   | 392,582                    |      | 33.12                    |   | 388,149                   |   | 34.23 |   | 397,611 |   | 35.27 |   |
| Residential real estate   |   | 353,569                    |      | 29.83                    |   | 324,051                   |   | 28.58 |   | 329,736 |   | 29.26 |   |
| Construction real estate  |   | 259,531                    |      | 21.90                    |   | 235,534                   |   | 20.78 |   | 227,393 |   | 20.18 |   |
| Installment and other     |   | 57,306                     |      | 4.84                     |   | 58,045                    |   | 5.12 |   | 57,356 |   | 5.09 |   |
| Total loans               |   | 1,185,150                  |      | 100.00                   |   | 1,133,729                 |   | 100.00 |   | 1,127,093 |   | 100.00 |   |
| Unearned income           |   | (1,899                     | )         |                     |   | (2,005                    | )      |   |   | (2,263 | ) |   |   |
| Gross loans               |   | 1,183,251                  |      |                     |   | 1,131,724                 |   |   |   | 1,124,830 |   |   |   |
| Allowance for loan losses |   | (13,528                    | )         |                     |   | (12,167                   | )      |   |   | (11,657 | ) |   |   |
| Net loans                 |   | $                          | 1,169,723 |                     |   |                      | $      | 1,119,557 |   |   |   | $ | 1,113,173 |   |   |   |
|                           |        |                            |           |                          |        |                           |        |  |  |  |  |  |  |  |  |  |  |

 

Total loans increased $51.4 million (4.5%) to $1.2 billion at September            30, 2007 from $1.1 billion at December 31, 2006. The increase was due primarily to            growth in the Company’s residential real estate and construction real estate            portfolios. During the same period, there was a slight drop in the commercial and            installment and other portfolios.

             

***Asset Quality.***The following table            sets forth the amounts of non-performing loans and non-performing assets at the dates            indicated:

 
|                                                                                |   | **At**

**September 30, 2007** |   | **At****December 31, 2006** |   | **At**

**September 30, 2006** |   |
|-------------------------------------------------------------------------------------|--------|--------------------------------|--------|-----------------------------|--------|--------------------------------|--------|
|                                                                                |   | **(Dollars in thousands)**     |   |
| Non-accruing loans                                                                  |   | $                              | 11,200 |                        | $      | 8,767                          |   | $ | 8,875 |   |
| Loans 90 days or more past due, still accruing                        interest |   | 29                             |   | 1                           |   | 34                             |   |
| Total non-performing loans                                                          |   | 11,229                         |   | 8,768                       |   | 8,909                          |   |
| Other real estate owned                                                             |   | 1,210                          |   | 165                         |   | 25                             |   |
| Other repossessed assets                                                            |   | 40                             |   | 60                          |   | 27                             |   |
| Total non-performing assets                                                         |   | $                              | 12,479 |                        | $      | 8,993                          |   | $ | 8,961 |   |
| Total non-performing loans to total loans                                           |   | 0.95                           | %      | 0.77                        | %      | 0.79                           | %      |
| Allowance for loan losses to non-performing loans                                   |   | 120.47                         | %      | 138.77                      | %      | 130.85                         | %      |
| Total non-performing assets to total assets                                         |   | 0.87                           | %      | 0.66                        | %      | 0.67                           | %      |

 

At September 30, 2007, total non-performing assets increased $3.5            million (38.8%) to $12.5 million from $9.0 million at December 31, 2006, primarily due            to increases in non-performing loans of $2.5 million and an increase in other real            estate owned of $1.0 million. Non-performing loans increased mainly due to a large            commercial loan and a large construction relationship being placed on non-accrual            status in 2007. Other real estate owned increased mainly due to the acquisition of four            pieces of residential real estate due to foreclosure.

 

***Allowance for Loan            Losses.*** Management believes the allowance for loan            losses accounting policy is critical to the portrayal and understanding of the            Company’s financial condition and results of operations. As such, selection and            application of this “critical accounting policy” involves judgments,            estimates, and uncertainties that are susceptible to change. In the event that            different assumptions or conditions were to prevail, and depending upon the severity of            such changes, the possibility of materially different financial condition or results of            operations is a reasonable likelihood.

The allowance for loan losses is maintained at an amount that management            believes will be appropriate to absorb probable losses on existing loans, based on an            evaluation of the collectability of loans and prior loss experience. This evaluation            also takes into consideration such factors as changes in the nature and volume of the            loan portfolio, the value of underlying collateral, overall portfolio quality, review            of specific problem loans and current economic conditions that may affect the            borrower’s ability to pay. While management uses the best information available            to make its evaluation, future adjustments to the allowance may be necessary if there            are significant changes in economic conditions. In addition, as an integral part of            their examination process regulatory agencies periodically review the Company’s            allowance for loan losses and may require the Company to make additions to the            allowance based on their evaluation of information available at the time of their            examinations.

 

24

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The following table presents an analysis of the allowance for loan            losses for the periods presented:

 
|                                                     |   | **Three Months Ended****September 30,** |      | **Nine Months Ended****September** **30,** |   |
|----------------------------------------------------------|--------|-----------------------------------------|-----------|-------------------------------------------------|--------|
|                                                     |   | **2007**                                |      | **2006**                                        |   | **2007** |   | **2006** |   |
|                                                     |   | **(Dollars in thousands)**              |      |
| Balance at beginning of                        period    |   | $                                       | 12,837    |                                            | $      | 10,116 |   | $ | 12,167 |   | $ | 8,842 |   |
| Provision for loan                        losses         |   | 1,050                                   |      | 1,322                                           |   | 3,150 |   | 4,122 |   |
| Total charge-offs                                        |   | (402                                    | )         | (89                                             | )      | (2,020 | ) | (1,730 | ) |
| Total recoveries                                         |   | 43                                      |      | 308                                             |   | 231 |   | 423 |   |
| Net charge-offs                                          |   | (359                                    | )         | 219                                             |   | (1,789 | ) | (1,307 | ) |
| Balance at end of                        period          |   | $                                       | 13,528    |                                            | $      | 11,657 |   | $ | 13,528 |   | $ | 11,657 |   |
|                                                     |   |                                    |      |                                            |   |   |   |   |   |   |   |   |   |
| Gross loans at end of                        period      |   | $                                       | 1,183,251 |                                            | $      | 1,124,830 |   | $ | 1,183,251 |   | $ | 1,124,830 |   |
| Ratio of allowance to total                        loans |   | 1.14                                    | %         | 1.03                                            | %      | 1.14 | % | 1.03 | % |
| Ratio of net charge-offs to average loans (1)            |   | 0.12                                    | %         | (0.08                                           | )%     | 0.21 | % | 0.16 | % |

_______________
| (1) | Net charge-offs are annualized for the purposes of this                        calculation. |
|-----|---------------------------------------------------------------------------------------------|

             

Net charge-offs for the three months ended September 30, 2007 totaled            $359 thousand, an increase of $578 thousand (263.9%), from a net recovery of $(219)            thousand for the three months ended September 30, 2006. The majority of the charge-offs            were installment and commercial loans. The increase in net charge-offs for the third            quarter of 2007 was due to the historically low amount of net charge-offs in the third            quarter of 2006, and a return in 2007 to more typical levels of charge-off activity.            The net charge-offs for the nine months ended September 30, 2007 totaled $1.8 million,            an increase of $482 thousand (36.9%) from net charge-offs of $1.3 million in the nine            months ended September 30, 2006. The majority of the charge-offs were commercial and            installment loans. Additionally, the provision for loan losses decreased by $272            thousand (20.6%) for the three months ended September 30, 2007 from the three months            ended September 30, 2006, due to management’s analysis of current non-performing            loans. The provision for loan losses also decreased by $972 thousand (23.6%) for the            nine months ended September 30, 2007 from the nine months ended September 30, 2006, due            to management’s analysis of current non-performing loans. For further            information, please see discussion in “Critical Accounting Policies            –Allowance for Loan Losses” and “Results of Operations—Income            Statement Analysis” above.

             

The following table sets forth the allocation of the allowance for loan            losses in each loan category for the periods presented and the percentage of loans in            each category to total loans. An allocation for a loan classification is only for            internal analysis of the adequacy of the allowance and is not an indication of expected            or anticipated losses:

 
|                                   |   | **At September 30, 2007**  |   | **At December 31, 2006** |   | **At September 30, 2006** |   |
|----------------------------------------|--------|----------------------------|--------|--------------------------|--------|---------------------------|--------|
|                                   |   | **Amount**                 |   | **Percent**              |   | **Amount**                |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                                   |   | **(Dollars in thousands)** |
| Commercial                             |   | $                          | 5,131  |                     | 10.31  | %                         | $      | 4,188 |   | 11.29 | % | $ | 3,843 |   | 10.20 | % |
| Commercial and residential real estate |   | 4,284                      |   | 62.95                    |   | 4,681                     |   | 62.81 |   | 4,261 |   | 64.53 |   |
| Construction real estate               |   | 3,229                      |   | 21.90                    |   | 2,362                     |   | 20.78 |   | 2,658 |   | 20.18 |   |
| Installment and other                  |   | 1,068                      |   | 4.84                     |   | 928                       |   | 5.12 |   | 883 |   | 5.09 |   |
| Unallocated                            |   | (184                       | )      | N/A                      |   | 8                         |   | N/A |   | 12 |   | N/A |   |
| Total                                  |   | $                          | 13,528 |                     | 100.00 | %                         | $      | 12,167 |   | 100.00 | % | $ | 11,657 |   | 100.00 | % |
|                                        |        |                            |        |                          |        |                           |        |  |  |  |  |  |  |  |  |  |  |  |

_______________

N/A—not applicable

 

 

25

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The allowance for loan losses increased $1.9 million (16.1%) from            September 30, 2006 to September 30, 2007. This was mainly due to an increase in the            allowance allocated to commercial non-real estate and construction loans. The            allocation for commercial non-real estate loans increased $1.3 million (33.5%) from            September 30, 2006 to September 30, 2007, mainly due to an increase in the allocation            for specifically identified loans of $1.2 million. The allocation for construction            loans increased $571 thousand (21.5%), mainly due to an increase in the allocation for            qualitative adjustments of $711 thousand, which was partially offset by a decrease in            the historical loss experience (based upon regression analysis) of $221 thousand For            further information, please see discussion in “Critical Accounting            Policies—Allowance for Loan Losses” above.

             

The Bank expects somewhat slower growth in its loan portfolio as the            pace of economic expansion in the New Mexico economy has moderated during the past            year. The Bank anticipates the volume of commercial real estate and construction loans            to slow as home builders attempt to reduce inventory and cut back on new starts of            residential properties. Overall, the outlook for the New Mexico economy in 2007 is            expected to be moderate and one of restrained growth. Nonfarm employment growth reached            3.0% in 2006, but is expected to reach only 1.7% in 2007 and 2008. Housing construction            overall is expected to remain depressed throughout the remainder of 2007, but            experience a modest recovery toward the end of 2008. Total net charge-offs have            increased approximately $482 thousand over the same nine months of last year mostly due            to increases of commercial non-real estate and consumer loan charge offs.

             

Additions to the allowance for loan losses, which are charged to            earnings through the provision for loan losses, are determined based on a variety of            factors, as indicated above. Although the Company believes the allowance for loan            losses is sufficient to cover probable losses inherent in the loan portfolio, there can            be no assurance that the allowance will prove sufficient to cover actual loan            losses.

             

***Potential Problem Loans.***The Company            utilizes an internal asset classification system as a means of reporting problem and            potential problem assets. At scheduled Board of Directors meetings every quarter, a            list of total adversely classified assets is presented, showing OREO, other repossessed            assets, and all loans listed as “Substandard,” “Doubtful” and            “Loss.”  All non-accrual loans are classed either as            “Substandard” or “Doubtful” and are thus included in total            adversely classified assets. A separate watch list of loans classified as            “Special Mention” is also presented. An asset is classified Substandard if            it is inadequately protected by the current net worth and paying capacity of the            obligor or by the collateral pledged, if any. Substandard assets include those            characterized by the distinct possibility that the Company will sustain some loss if            the deficiencies are not corrected. Assets classified as Doubtful have all the            weaknesses inherent in those classified Substandard with the added characteristic that            the weaknesses present make collection or liquidation in full, on the basis of            currently existing facts, conditions and values, highly questionable and improbable.            Assets classified as Loss are those considered uncollectible and viewed as non-bankable            assets worthy of charge-off. Assets that do not currently expose the Company to            sufficient risk to warrant classification in one of the aforementioned categories but            possess weaknesses that may or may not be within the control of the customer, are            deemed to be Special Mention.

             

 

26

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The Company’s determinations as to the classification of its            assets and the amount of its valuation allowances are subject to review by the            Bank’s primary regulators, which can order the establishment of additional            general or specific loss allowances. The OCC, in conjunction with the other federal            banking agencies, has adopted an interagency policy statement on the allowance for loan            losses. The policy statement provides guidance for financial institutions on both the            responsibilities of management for the assessment and establishment of adequate            allowances and guidance for banking agency examiners to use in determining the adequacy            of general valuation guidelines. Generally, the policy statement recommends that            (i) institutions have effective systems and controls to identify, monitor and            address asset quality problems; (ii) management analyze all significant factors            that affect the collectability of the portfolio in a reasonable manner; and            (iii) management establish acceptable allowance evaluation processes that meet the            objectives set forth in the policy statement. Management believes it established an            adequate allowance methodology to determine probable loan losses and has provided for            probable loan losses in the allowance accordingly. The Company analyzes its process            regularly with modifications made as necessary, and reports those results quarterly at            Board of Directors meetings. However, there can be no assurance that regulators, in            reviewing the Company’s loan portfolio, will not request the Company to            materially increase its allowance for loan losses. Although management believes that            adequate specific and general loan loss allowances have been established, actual losses            are dependent upon future events and, as such, further additions to the level of            specific and general loan loss allowances may become necessary.

             

The following table shows the amounts of adversely classified assets and            special mention loans as of the periods indicated:

 
|                              |   | **At September 30, 2007**  |   | **At December 31, 2006** |   | **At September 30,** **2006** |   |
|-----------------------------------|--------|----------------------------|--------|--------------------------|--------|------------------------------------|--------|
|                              |   | **(Dollars in thousands)** |   |
| Loans classified as:              |   |                       |   |                     |   |                               |   |
| Substandard                       |   | $                          | 17,319 |                     | $      | 12,924                             |   | $ | 13,165 |   |
| Doubtful                          |   | 2,828                      |   | 2,177                    |   | 1,774                              |   |
| Total adversely classified loans  |   | 20,147                     |   | 15,101                   |   | 14,939                             |   |
| Other real estate owned           |   | 1,210                      |   | 165                      |   | 23                                 |   |
| Other repossessed assets          |   | 40                         |   | 60                       |   | 27                                 |   |
| Total adversely classified assets |   | $                          | 21,397 |                     | $      | 15,326                             |   | $ | 14,991 |   |
| Special mention loans             |   | $                          | 8,529  |                     | $      | 9,044                              |   | $ | 3,196 |   |

 

Total adversely classified assets increased $6.3 million (41.9%) from            September 30, 2006 to September 30, 2007. The main reason for the increase was an            increase of $4.0 million in substandard loans. This was primarily due to the            downgrading of three large commercial relationships in the first nine months of 2007.            The Company believes it has adequate collateral as security for these loans. Special            mention loans increased $5.3 million (166.9%) between September 30, 2006 and September            30, 2007, primarily due to downgrades of credits from the pass grades in the commercial            loan portfolio.

             

**Sources of Funds**

 

***Liquidity and Sources of Capital***

             

The Company’s cash flows are comprised of three classifications:            cash flows from operating activities, cash flows from investing activities and cash            flows from financing activities. Net cash provided by operating activities was $19.9            million and $16.0 million for the nine months ended September 30, 2007 and September            30, 2006. Net cash provided by operating activities increased $3.9 million in the first            nine months of 2007 compared to the first nine months of 2006 largely due to an            increase in the sale of loans held for sale, net of originations, of $3.7 million. Net            cash used in investing activities was $(100.2) million and ($77.7) million for the nine            months ended September 30, 2007 and September 30, 2006. The $22.5 million increase in            cash used in investing activities was largely due to an increase in cash used to            purchase investment securities available for sale of $116.3 million, which was            partially offset by a decrease in cash used to fund loans, net of prepayments, of $52.0            million and an increase in cash provided by the proceeds from maturities and paydowns            of investment securities of $27.0 million and an increase in cash provided by the            proceeds from the sales of investment securities of $14.8 million. Net cash provided by            financing activities was $56.6 million and $83.9 million for the nine months ended            September 30, 2007 and September 30, 2006, respectively. The $27.3 million decrease in            cash provided by financing activities was mainly due to a decrease in new deposit            growth of $20.2 million from the first nine months of 2007 compared to the first nine            months of 2006, and a decrease in cash provided by the issuance of trust preferred            securities of $10.3 million between the two periods.

             

 

27

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In the event that additional short-term liquidity is needed, the Company            has established relationships with several large regional banks to provide short-term            borrowings in the form of federal funds purchases. Management believes that the Company            could borrow up to $142.0 million for a short time from these banks on a collective            basis based on current lines of credit the Company has at these banks. Additionally,            the Company is a member of the FHLB and has the ability to borrow from the FHLB. As a            contingency plan for significant funding needs, the Asset/Liability Management            Committee may also consider the sale of investment securities, selling securities under            agreement to repurchase, sale of certain loans and/or the temporary curtailment of            lending activities.

             

At September 30, 2007, Trinity’s total risk-based capital ratio            was 11.87%, the Tier 1 capital to risk-weighted assets ratio was 10.11%, and the Tier 1            capital to average assets ratio was 8.22%. At December 31, 2006, Trinity’s total            risk-based capital ratio was 11.50%, the Tier 1 capital to risk-weighted assets ratio            was 9.60%, and the Tier 1 capital to average assets ratio was 7.97%.

 

At September 30, 2007, the Bank’s total risk-based capital ratio            was 11.44%, the Tier 1 capital to risk-weighted assets ratio was 10.26%, and the Tier 1            capital to average assets ratio was 8.34%. At December 31, 2006, the Bank’s total            risk-based capital ratio was 10.97%, the Tier 1 capital to risk-weighted assets ratio            was 9.87%, and the Tier 1 capital to average assets ratio was 8.17%. The Bank was            categorized as “well-capitalized” under Federal Deposit Insurance            Corporation regulations at September 30, 2007 and December 31, 2006.

 

At September 30, 2007 and December 31, 2006, Trinity’s book value            per common share was $13.48 and $12.35.

             

**Item** **3.            Quantitative and Qualitative Disclosures About Market Risk**

 

**Asset Liability Management**

 

The Company’s net interest income is subject to “interest            rate risk” to the extent that it can vary based on changes in the general level            of interest rates. It is the Company’s policy to maintain an acceptable level of            interest rate risk over a range of possible changes in interest rates while remaining            responsive to market demand for loan and deposit products. The strategy the Company            employs to manage its interest rate risk is to measure the risk using an            asset/liability simulation model and adjust the maturity of securities in its            investment portfolio to manage that risk.

             

Interest rate risk can also be measured by analyzing the extent to which            the repricing of assets and liabilities are mismatched to create an interest            sensitivity “gap.” An asset or liability is considered to be interest rate            sensitive within a specific time period if it will mature or reprice within that time            period. The interest rate sensitivity gap is defined as the difference between the            amount of interest-earning assets maturing or repricing within a specific time period            and the amount of interest-bearing liabilities maturing or repricing within that same            time period. A gap is considered positive when the amount of interest rate sensitive            assets exceeds the amount of interest rate sensitive liabilities. A gap is considered            negative when the amount of interest rate sensitive liabilities exceeds the amount of            interest rate sensitive assets. During a period of rising interest rates, therefore, a            negative gap would tend to adversely affect net interest income. Conversely, during a            period of falling interest rates, a negative gap position would tend to result in an            increase in net interest income.

             

 

28

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The following tables set forth the amounts of interest-earning assets            and interest-bearing liabilities outstanding at September 30, 2007, which the Company            anticipates, based upon certain assumptions, to reprice or mature in each of the future            time periods shown. Except as stated below, the amount of assets and liabilities shown            which reprice or mature during a particular period were determined based on the earlier            of the term to repricing or the term to repayment of the asset or liability. These            tables are intended to provide an approximation of the projected repricing of assets            and liabilities at September 30, 2007 on the basis of contractual maturities and            scheduled rate adjustments within a three-month period and subsequent selected time            intervals. The loan amounts in the table reflect principal balances expected to be            reinvested and/or repriced as a result of contractual amortization and rate adjustments            on adjustable-rate loans. The contractual maturities and amortization of loans and            investment securities reflect modest prepayment assumptions. While NOW, money market            and savings deposit accounts have adjustable rates, it is assumed that the interest            rates on these accounts will not adjust immediately to changes in other interest rates.            Therefore, the table is calculated assuming that these accounts will reprice based upon            an historical analysis of decay rates of these particular accounts, with repricing            assigned to these accounts from 1 to 11 months.

 
|                                                                          |   | **Time to Maturity or Repricing** |    |
|-------------------------------------------------------------------------------|--------|-----------------------------------|---------|
| **As of September 30, 2007:**                                                 |   | **0-90 Days**                     |    | **91-365 Days** |   | **1-5 Years** |   | **Over 5 Years** |   | **Total** |   |
|                                                                          |   | **(Dollars in thousands)**        |    |
| **Interest-earning Assets:**                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Loans                                                                         |   | $                                 | 585,726 |   | $ | 447,573 |   | $ | 50,049 |   | $ | 99,903 |   | $ | 1,183,251 |   |
| Loans held for sale                                                           |   | 4,638                             |    | — |   | — |   | — |   | 4,638 |   |
| Investment securities                                                         |   | 59,220                            |    | 57,577 |   | 22,490 |   | 11,568 |   | 150,855 |   |
| Securities purchased under agreements to resell                               |   | 15,391                            |    | — |   | — |   | — |   | 15,391 |   |
| Interest-bearing deposits with banks                                          |   | 13,263                            |    | — |   | — |   | — |   | 13,263 |   |
| Investment in unconsolidated trusts                                           |   | 186                               |    | — |   | — |   | 930 |   | 1,116 |   |
| Total interest-earning assets                                                 |   | $                                 | 678,424 |   | $ | 505,150 |   | $ | 72,539 |   | $ | 112,401 |   | $ | 1,368,514 |   |
| **Interest-bearing Liabilities:**                                             |   |                              |    |   |   |   |   |   |   |   |   |
| NOW deposits                                                                  |   | $                                 | 84,122  |   | $ | 40,032 |   | $ | — |   | $ | — |   | $ | 124,154 |   |
| Money market deposits                                                         |   | 122,778                           |    | 54,694 |   | — |   | — |   | 177,472 |   |
| Savings deposits                                                              |   | 202,900                           |    | 71,983 |   | — |   | — |   | 274,883 |   |
| Time deposits over $100,000                                                   |   | 131,335                           |    | 144,881 |   | 51,428 |   | 3,167 |   | 330,811 |   |
| Time deposits under $100,000                                                  |   | 81,035                            |    | 110,462 |   | 24,841 |   | 2,269 |   | 218,607 |   |
| Short-term borrowings                                                         |   | —                           |    | 40,000 |   | — |   | — |   | 40,000 |   |
| Long-term borrowings                                                          |   | 7                                 |    | 24 |   | 20,117 |   | 3,430 |   | 23,578 |   |
| Capital lease obligations                                                     |   | —                           |    | — |   | — |   | 2,211 |   | 2,211 |   |
| Borrowings made by ESOP to outside parties                                    |   | 271                               |    | — |   | — |   | — |   | 271 |   |
| Junior subordinated debt owed to unconsolidated                        trusts |   | 6,186                             |    | — |   | — |   | 30,930 |   | 37,116 |   |
| Total interest-bearing liabilities                                            |   | $                                 | 628,634 |   | $ | 462,076 |   | $ | 96,386 |   | $ | 42,007 |   | $ | 1,229,103 |   |
| Rate sensitive assets (RSA)                                                   |   | $                                 | 678,424 |   | $ | 1,183,574 |   | $ | 1,256,113 |   | $ | 1,368,514 |   | $ | 1,368,514 |   |
| Rate sensitive liabilities (RSL)                                              |   | 628,634                           |    | 1,090,710 |   | 1,187,096 |   | 1,229,103 |   | 1,229,103 |   |
| Cumulative GAP (GAP=RSA-RSL)                                                  |   | 49,790                            |    | 92,864 |   | 69,017 |   | 139,411 |   | 139,411 |   |
| RSA/Total assets                                                              |   | 47.52                             | %       | 82.91 | % | 87.99 | % | 95.87 | % | 95.87 | % |
| RSL/Total assets                                                              |   | 44.04                             | %       | 76.41 | % | 83.16 | % | 86.10 | % | 86.10 | % |
| GAP/Total assets                                                              |   | 3.49                              | %       | 6.51 | % | 4.83 | % | 9.77 | % | 9.77 | % |
| GAP/RSA                                                                       |   | 7.34                              | %       | 7.85 | % | 5.49 | % | 10.19 | % | 10.19 | % |
|                                                                               |        |                                   |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Certain shortcomings are inherent in the method of analysis presented in            the foregoing table. For example, although certain assets and liabilities may have            similar maturities or periods to repricing, they may react in different degrees to            changes in market interest rates. Also, the interest rates on certain types of assets            and liabilities may fluctuate in advance of changes in market interest rates, while            interest rates on other types of assets may lag behind changes in market rates.            Additionally, in the event of a change in interest rates, prepayment and early            withdrawal levels would likely deviate significantly from those assumed in calculating            the table. Therefore, the Company does not rely solely on a gap analysis to manage its            interest rate risk, but rather uses what management believes to be the more reliable            simulation model relating to changes in net interest income.

             

 

29

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Based on simulation modeling at September 30, 2007 and December 31,            2006, the Company’s net interest income would change over a one-year time period            due to changes in interest rates as follows:

             

**Change in Net Interest Income Over One Year Horizon**

 
| **Changes in Levels of****Interest Rates** |              | **At September 30, 2007**  |                  | **At December 31, 2006** |              |
|--------------------------------------------|-------------------|----------------------------|-----------------------|--------------------------|-------------------|
|                                       | **Dollar Change** |                       | **Percentage Change** |                     | **Dollar Change** |   | **Percentage Change** |   |
|                                       |              | **(Dollars in thousands)** |                  |
| + 2.00                                     | %                 | $                          | (4,869                | )                        | (9.96             | )% | $ | (2,695 | ) | (5.69 | )% |
| + 1.00                                     |              | (3,847                     | )                     | (7.87                    | )                 | (180 | ) | (0.38 | ) |
| (1.00                                      | )                 | (2,273                     | )                     | (4.65                    | )                 | (1,629 | ) | (3.44 | )  |
| (2.00                                      | )                 | (2,229                     | )                     | (4.56                    | )                 | (2,070 | ) | (4.37 | )  |
|                                            |                   |                            |                       |                          |                   |  |  |  |  |  |  |

 

The Company’s simulations assume the following:

             
|   | 1. | Changes in interest rates are immediate. |
|--------|----|------------------------------------------|

             
|   | 2. | It is the Company’s policy that interest rate exposure                        due to a 2% interest rate rise or fall be limited to 15% of its annual net                        interest income, as forecasted by the simulation model. As demonstrated by                        the table above, the Company’s interest rate risk exposure was within                        this policy at September 30, 2007. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Changes in net interest income between the periods above reflect changes            in the composition of interest-earning assets and interest-bearing liabilities, related            interest rates, repricing frequencies, and the fixed or variable characteristics of the            interest-earning assets and interest-bearing liabilities. Projections of income given            by the model are not actual predictions, but rather show the Company’s relative            interest rate risk. Actual interest income may vary from model projections.

             

**Item            4. Controls and Procedures.**

 

**Evaluation of Disclosure Controls and Procedures**

 

The Company has established disclosure controls and procedures to ensure            that material information relating to the Company is made known to the officers who            certify the Company’s financial reports and to other members of senior management            and the Board of Directors and to ensure that information that is required to be            disclosed in reports Trinity files with the SEC is properly and timely recorded,            processed, summarized and reported. A review and evaluation was performed by the            Company’s management, including Trinity’s Chief Executive Officer (the            “CEO”) and Chief Financial Officer (the “CFO”), of the            effectiveness of the design and operation of the Company’s disclosure controls            and procedures as of September 30, 2007, pursuant to Rule 13a-15(b) under the            Securities Exchange Act of 1934. Based upon and as of the date of that review and            evaluation, the CEO and CFO have concluded that the Company’s disclosure controls            and procedures were effective as of September 30, 2007.

             

**Changes in Internal Control over Financial Reporting.**

 

There have been no changes to the Company’s internal control over            financial reporting during the last fiscal quarter that have affected, or are            reasonably likely to affect, its internal control over financial reporting.

             

**PART            II — OTHER INFORMATION**

 

**Item            1. Legal Proceedings**

 

Trinity, the Bank, Title Guaranty, TCC Appraisal Services, TCC Advisors            and TCC Funds are not involved in any pending legal proceedings other than routine            legal proceedings occurring in the normal course of business except as otherwise stated            herein, which, in the opinion of management, in the aggregate, are material to the            Company’s consolidated financial condition.

 

 

30

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**Item            1A. Risk Factors**

 

In addition to the other information in this Quarterly Report on Form            10-Q, shareholders or prospective investors should carefully consider the risk factors            disclosed in Item 1A to Part I of Trinity’s Form 10-K for the year ended December            31, 2006 filed with the Securities and Exchange Commission on March 16, 2007, and as            amended in Trinity’s Form 10-Q for the quarter ended June 30, 2007 filed on            August 9, 2007. There have been no material changes to the risk factors as previously            disclosed, except as otherwise provided below.

 

**Our            profitability is dependent upon the health of the markets in which we            operate**. As discussed in the “Risk Factors”            discussion in Trinity’s Form 10-K for the year ended December 31, 2006 and the            Form 10-Q for the quarter ended June 30, 2007, the health of Los Alamos National            Laboratory (“Laboratory”) is central to the economic health of northern and            central New Mexico. The main indicator of the Laboratory’s health is its funding.            The Laboratory’s 2008 fiscal year funding remains “in conference” in            the United States Congress, in an attempt to resolve the variations for proposed            Laboratory funding. The United States House of Representatives passed a budget which            could reportedly result in an approximate $300 million (13.6%) decrease from the            Laboratory’s current funding of $2.2 billion. The United States Senate passed a            budget without material reduction. The Laboratory is reportedly taking operational            measures to address any possible funding shortfall which may include a reduction in            force. However, a continuing resolution provides for the Laboratory to operate under            the funding level for the 2006-2007 fiscal year until final funding legislation is            passed. A material decrease in the Laboratory’s budget may affect our customers'            business and financial interests, adversely affect economic conditions in our market            area, affect the ability of our customers to repay their loans to us and generally            affect our financial condition and results of operations.

 

**Item            2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

During the third quarter of 2007, Trinity repurchased the following            securities:

 
| **Period**                     |   | **(a)****Total number of shares****purchased** |   | **(b)****Average price paid per****share** |   | **(c)****Total number of shares****purchased as part of****publicly announced plans****or programs** |    | **(d)****Maximum approximate****dollar value that may yet be****purchased under the plans or****programs** |   |
|--------------------------------|--------|------------------------------------------------|--------|--------------------------------------------|--------|------------------------------------------------------------------------------------------------------|---------|------------------------------------------------------------------------------------------------------------|--------|
| July 1-July 31, 2007           |   | 20,225                                         |   | $                                          | 28.44  |                                                                                                 | 20,225  | (1)                                                                                                        | $      | 175 |   |
| August 1-August 31, 2007       |   | 6,151                                          |   | 28.41                                      |   | 6,151                                                                                                |    | —                                                                                                    |   |
| September 1-September 30, 2007 |   | 5,342                                          | (2)    |                                       | 29.00  |                                                                                                 | — |                                                                                                       |   | — |   |
| Total                          |   | 31,718                                         |   | $                                          | 28.53  |                                                                                                 | 12,456  |                                                                                                       | $      | — |   |

 _______________
| (1) | On July 26, 2007, Trinity announced that it would extend a                        stock repurchase plan that allowed the repurchase of up to $750 thousand in                        outstanding shares of Trinity’s common stock.  By August 8,                        2007, this repurchase was completed. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | In September 2007, a former employee exercised their put                        option on shares they owned in the Employee Stock Ownership Plan.                         Under this put option, Trinity has up to five years to repurchase the                        shares from the participants at the last appraised value of the stock.                        Trinity elected to repurchase these shares over three years from the plan                        participant. Total shares repurchased by Trinity under the put option were                        5,342. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Item            3. Defaults Upon Senior Securities**

 

None

             

**Item            4. Submission of Matters to a Vote of Security Holders**

 

None

             

**Item            5. Other Information**

 

None

             

 

31

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**Item            6. Exhibits**

 
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule                        13a-14(a)/15d-14(a) |
|------|------------------------------------------------------------------------------------------------------|
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule                        13a-14(a)/15d-14(a) |
|------|------------------------------------------------------------------------------------------------------|
| 32.1 | Certification of Chief Executive Officer Pursuant to 18                        U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the                        Sarbanes-Oxley Act of 2002. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.2 | Certification of Chief Financial Officer Pursuant to 18                        U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the                        Sarbanes-Oxley Act of 2002. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the            registrant has duly caused this registration statement to be signed on its behalf by            the undersigned thereunto duly authorized.

 
|                                          | **TRINITY CAPITAL                        CORPORATION** |
|-----------------------------------------------|--------------------------------------------------------|
|                                          |                                                   |
|                                          |                                                   |
| Date: November 9,                        2007 | By:                                                    | /s/ WILLIAM C. ENLOE |
|                                          |                                                   | William C. Enloe |
|                                          |                                                   | President and Chief Executive Officer |
|                                          |                                                   |   |
| Date: November 9,                        2007 | By:                                                    | /s/ DANIEL R. BARTHOLOMEW |
|                                          |                                                   | Daniel R. Bartholomew |
|                                          |                                                   | Chief Financial Officer |

 

 

 

32

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